Philip Harman
It is at this time each year when we make New Year’s resolutions, to help reduce the gap between where we are today and where we want to be in the future. Having been able to speak to thousands of investors over the last five years, I have compiled a list of my favorite New Year’s resolutions that will help stock market investors, no matter which way the market goes this year.
1 Reduce Costs
While most investors are focused on how to make more money in the stock market, it is just as important to try to reduce your costs of investing. Like any good CEO, you must focus on getting the best value possible for every dollar you spend. While it would be exciting to find an area in which you could save a large sum of money, it is often the little expenses that fly just under our mental radar that end up costing us the most. Keep an eye on commissions, service fees and transaction fees. Whether you spend $49, $29, $19, or even $9.99, to make a trade, in the end, you’ll get exactly the same result.
2 Think Small
Concentrate on hitting singles, not home runs. Everyone has dreams of making it big in the stock market. But the quest to hit a big home run often comes at the expense of taking advantage of the markets’ internal ability to rise over the long-term. If you can just increase the value of your portfolio by just an extra 1% per year, it could end up netting you hundreds of thousands of dollars in extra profits over the long-term. A $500,000 portfolio, earning 4%, will be worth $1,095,561 in 20 years. Add an additional 1%, and you will increase your returns by an additional $231,000.
3 Fire Your Mutual Fund Company
According to the last count, there are over 10,000 mutual funds in North America, which means that there are more mutual funds than stocks. Why are there so many? A mutual fund company is one of the most profitable businesses to start, with little or no risk. That is why every bank, insurance company, brokerage company and financial institution in the world, also sells mutual funds. And as history tells us, lack of performance does not hinder a mutual fund company’s ability to succeed, as it would in say a business like a drug company, or an energy company. Remember the basis of the mutual fund company is to invest with other people’s money, and charge them for doing so. And they do so, while rarely ever beating the stock market indexes.
In the previous resolution, we looked at how a 1% increase, in your return, could earn you an extra $231,000. This is the same 1% return that the mutual fund companies are hoping to skim off your portfolio over the next 20 years.
Can you tell yourself, in the next 60 seconds, why you are dealing with your current mutual fund company? Is it because of the above average returns? Is it because of the lower than average fees? If not, then you may be stuck with its $231,000 gorilla sitting on your shoulders for the next 20 years.
If you do not want to fire your mutual fund company, then, you might be able to get by just being more selective in the funds that you choose from their fund family. Most mutual fund companies today now offer “Index” funds at a lower expense ratio than their normal “Managed” funds. Historically, Index funds, will outperform Managed funds over the long run. In many cases, you should be able to save, at least, 1% in your annual fees.
The more extreme solution, but increasingly popular, would be to move from mutual funds to exchange traded funds.
Exchange traded funds, or ETF’s, are very similar to mutual funds, but trade, just like stocks. In fact, some of the major exchange traded funds are now some of the most popular stocks traded on the major indexes.
4 Invest In A Mutual Fund Company
The best way to make money in mutual funds, is to invest in a mutual fund company.
5 Avoid The Crowd
Many people save for their retirement by making regular monthly contributions. This is probably the best way to save for the long-term. Unfortunately, most people make this contribution at the end of the month. With so much new money entering the market at the end of each month, stocks will often trade higher for a couple of days before, and a couple of days after month end, meaning that you may end up paying higher prices. Try moving your contribution date to the middle of the month and avoid the month end price squeeze.
6 Never Wait For The Why
Have you ever tried to tell a three-year-old to do something? Inevitably, their reply will be a one-word answer, “Why?”. Well, it seems like we never lose that childish curiosity which causes us to reply to an instruction, by asking the question why.
Unfortunately, the stock market is not in the habit of telling us why we need to do something at the time we need to do it.
If you have been waiting to take action in the market, and the opportunity presents itself, do not stop and look around for the answer to the question why. Take action first, and the answer to the question why will come later.
Why sell Enron? Why sell Taser? Why sell Krispy Kreme? Why sell General Motors?
7 Learn The Skill Of Selling
We live in a society where we are born and bred to be shoppers. From the time we wake up in the morning, until we go to sleep at night, we are bombarded with messages that tell us to buy, buy, buy. So it’s no wonder that investors find it very easy to buy stocks, but feel uncomfortable when it comes time to sell them. Selling should be about taking profits, or avoiding loss. It should not be about being right or wrong. Some of the greatest investors in the world are wrong more than they are right. But when they’re wrong, they sell quickly and reduce their loss, and risks. And when they’re right, they hold on as long as possible, until the market tells them to sell.
When the stock market fell in 2000, investors did not lose money because they did not know what stocks to buy, they lost money because they did not know when to sell.
8 The First One Now Will Later Be Last
It was nearly 40 years ago when the famous singer/songwriter, Bob Dylan, wrote those famous words “The first one now will later be last”. Obviously, Mr. Dylan was not referring to the stock market, but he could’ve been. As a society, we love success. We love to follow and idolize winners in just about any sector of society, including winners in the stock market. Unfortunately, it is very rare that you see a winner repeat its performance, year after year.
What was the best-performing stock, mutual fund or sector last year, will not be the best-performing stock, mutual fund or sector this year.
Don’t chase success. Buying last year’s best-performing anything, could be one of the most costly investment mistakes you ever make.
9 Manage What You Can Manage
When a baseball coach walks out, onto the field, is he managing the players on his team, or the spectators in the stands?
When you look at the stock market, are you trying to manage all the stocks in the stock market, or are you trying to manage your selected group of better than average stocks, ETF’s, and mutual funds?
There is a logical reason why there are only so many players on a sports team; why there are only so many soldiers in a platoon; and why there are only so many people working for an accounts receivable manager.
Your goal should be to keep the list of the things that you’re following as small as possible.
If you’re following more stocks than the president has seats of his cabinet table, you’re probably following too many.
Have a Happy New Year and all the best to you and your family in 2022.
