Some Good Financial Resolutions for 2017
As we close out the surprise-laden year of 2016 (think Trump, Brexit, and the Cubs), now is a good time to think about how to improve your financial situation for the coming year and beyond. For us at Clarity, the first thing that comes to mind is keeping investing costs under control, which is especially important in this era of low interest rates and high equity valuations. Unfortunately, many investors still fall victim to the scam of high-cost active management, but the trend toward lower-cost passively managed funds continues unabated. Among costs beyond fund fees and commissions, one should not overlook fees paid to financial advisors. Per AdvisoryHQ, the average financial advisor fee for a $1 million account is 1.02% or $10,200 per year. From the perspective of a retiree with a $1 million nest egg, that advisory fee is likely to be his single largest cost.
The second resolution is derived from Jason Zweig’s First Commandment of investing (from The Little Book of Safe Investing), “Thou shalt take no risk that thou needst not take.” One of the most common unnecessary risks that we see investors take is owning individual stocks which carry the same expected return as the overall market but with much higher volatility. Zweig’s sage advice brings up another problem with actively managed funds, that they entail taking on unnecessary risk exposures by overweighing some individual companies and sectors at the expense of others. Investors would also do well to heed Zweig’s Second Commandment, “Thou shalt take no risk that is not most certain to reward thee for taking it.” At Clarity, we interpret this to mean that investors should take the risks that are worth taking—market, size, and relative price for stocks and term and credit for bonds. The certainty of reward with these risks increases with the duration of the exposure, but unfortunately, it never reaches 100%. Zweig’s Third Commandment reads, “Thou shalt put no money at risk that thou canst not afford to lose.” For our clients, we recommend having three to six months of living expenses in FDIC-insured deposits.
The third and final resolution is to understand how we humans are vulnerable to behavioral-based errors. A truly excellent book on this subject is James Montier’s The Little Book of Behavioral Investing: How Not to Be Your Own Worst Enemy. Another highly entertaining and informative read is the latest work from the inimitable Michael Lewis, The Undoing Project: A Friendship that Changed Our Minds. The friendship is that between Nobel Laureate Daniel Kahneman and the late Amos Tverski, the pioneers of the field of Behavioral Finance.
We at Clarity wish all of you a happy, healthy, and prosperous New Year for 2017.