Quick Market Update
Noise-Cancelling Headphones and Other New Year’s Resolutions
December 12, 2013
Dean Junkans, CFA®
Chief Investment Officer
In this Quick Market Update:
In the spirit of contemplating the year end, here are three New Year’s resolutions for investors:
Create an investment plan.
Review your portfolio to be sure it lines up with your investment plan.
Reduce the noise.
In my opinion, the holidays are a time to slow down, spend time with family, give and receive gifts, reflect on the past year, and look forward to a new one. If this does not sound like your holidays and you find yourself so busy that you do not think you have the time to do these things even though you want to, it may be time to add them to your New Year’s resolutions.
There are at least two schools of thought regarding New Year’s resolutions. The first is what I call the “fresh start” approach. This is usually calendar based and as we get close to flipping the page of the calendar from 2013 to 2014, we think about what we want to change or possibly what we want to accomplish. The second school of thought is that if you want to change or accomplish something, it seems silly to base this on a calendar as you could simply decide to make that change anytime during the year, and not wait until a brand new year to do so.
Regardless of your approach to resolutions, most of the experts in this area suggest keeping the list relatively short to improve your chances of success. In that spirit, I offer three New Year’s resolutions for investors:
1. Create an investment plan. This is one of the most important things you can do as an investor and one of the biggest factors in investment success. If you already have a plan—congratulations! You are well on your way! If not, I suggest you consider seeking out a professional who can help walk you through the process. It is not as painful as you might think and can actually be quite enjoyable (at least I think so). If you have a plan, review it and update it, if necessary, to make sure it still reflects your goals, your attitude towards risk vs. reward, and covers everything that is important to you for your investment journey. Some important elements of a plan to review each year include:
Liquidity requirements: Are there events coming up in your life where you will need ready access to cash, such as a major purchase or the need to pay for a child’s wedding?
Liquidity events: Are you anticipating a liquidity event such the sale of a business? Will your investment needs change as a result of this event?
Income considerations: Do you anticipate any increase or reduction in your income needs over the next year?
A change in your personal situation: Have you experienced a recent addition to your family, retirement or other major life change that may result in a need to revise your financial priorities?
2. Review your portfolio to be sure it lines up with your investment plan. Specifically, review your goals and whether the way in which your portfolio is constructed is designed to meet those goals. Chances are good that you will need to assess what is in your portfolio to make sure your assets are fulfilling their designated role in meeting your financial objectives. This may even require making some adjustments to your portfolio. Here are a few possible areas that you may want to review based on changes in the investment landscape of this past year:
Tax efficiency: For many investors, taxes went up this year and in a variety of ways. These tax increases may have included a rise in state and federal ordinary tax rates, dividend income and capital gains tax rates, and higher distributions of gains from investment vehicles. These tax increases may result in a desire to achieve greater tax efficiency in your portfolio overall. You can potentially achieve this by looking at individual components of your portfolio, such as whether certain types of investments are held in taxable accounts vs. tax qualified accounts, and so on.
Credit quality: For investors with tax-exempt bonds, a review of credit quality may be particularly timely. There are certainly many municipalities that have experienced an improvement in their financials in the past year due to either higher tax revenues and/or stabilized expense structures. Yet there are also municipalities whose finances have deteriorated, in many cases due to challenges related to underfunded pension and health care liabilities.
Rebalancing: It has been a year in which we have seen notable outperformance by certain types of assets, while the performance of others has been disappointing. When we have a year like this where there is a lot of performance divergence between asset classes, there is a tendency for investors to want to purchase more of what has worked and jettison those that have not. Such a strategy can end up increasing risk for investors as they buy assets that are more expensive and sell assets that are on sale, and they end up being concentrated or out of balance in certain types of assets. Having a disciplined approach to rebalance back to your investment plan’s target asset allocation can help to take the emotion out of this decision and keep risk levels more in line with what you had originally intended.
3. Reduce the noise. It is often difficult for investors to stay disciplined when there is so much noise out there masquerading as information. Should you act on it? What if you don’t act on it? Is everyone else acting on it? Am I missing an opportunity? Should I be worried? And if I do act on it, should I act on the next piece of noise that I hear in the next hour, day or week? And what if that noise is contradictory to what I just acted on? I’m sure you get the point.
I fly a lot and one of the ways I find peace and focus during a flight is by wearing noise-cancelling headphones. I have found they are beneficial in numerous ways. For example, I don’t hear all the coughing on the plane when I am wearing them. And if I don’t hear all the coughing, then I won’t be as worried about getting sick. On a recent flight, I didn’t even notice the turbulence. I am not saying you should ignore everything, but managing the flow of information (aka noise) is critical to long-term investment success.
As we get ready to enter 2014, there will be an overabundance of commentary on what to expect in the new year from an economic and portfolio-positioning perspective. One thing to keep in mind is that despite any of the worries, fears, and challenges that might be discussed, we are entering the new year with a solid foundation in the U.S. and globally.
In the U.S. economy, we are seeing strength in job growth (it was just reported that there are now 3.9 million job openings in the U.S., 1.5 million more than at the end of 2009), manufacturing, the service sector, and autos, as well as record high rail shipments and global shipping which indicate a resurgence in economic activity and trade, and low inflation. Globally, we are seeing a pickup in activity that also bodes well for 2014. This includes an improvement in key developed economies (such as U.K., Japan, and even continental Europe), some signs of stabilization and improvement in several emerging market economies, and overall strong corporate balance sheets.
So, there you have it, three simple, but important resolutions for investors for the new year. Stay focused on what is important, enjoy the holidays, and best wishes for the New Year!
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