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Building Blocks For Your Investment Success

Over the years, I have not broken any New Year’s resolutions - because I’ve never made any. I generally believe that New Year’s resolutions are made to be broken and often evaporate as quickly as they are made. In fact, despite our best intentions with resolutions, nothing really happens post New Year’s Day since only 8% of people actually keep their resolutions

Improving Brick By Brick

Given unrealistic goals and feeble results with resolutions, I am focusing on building blocks to be a better person and family member. Therefore, for the upcoming year(s), my five personal building blocks include eating more veggies (brussel sprouts remain a nonstarter), read more fiction, use my own grocery bags, stretch more often and walk my dogs more regularly. I view the bar as fairly low with these goals and even if I only accomplish some of them, I can gain greater health and happiness and so will my dogs.

I believe a building blocks approach can also be used for better investing habits. Think of these steps as your own investment Lego brick building set since Legos are proven to help with the ability to organize and then execute on important skills like persistence and problem solving. These real and time-tested investment building blocks don’t change from year to year unlike resolutions. They can serve as key steps for building effective and confident investor behavior, disciplined goal-based investing and calmer nerves.

Drum Roll Please….

So, for the first time, I unveil my Five Investing Building Blocks:

Asset Allocation. Like a healthy diet of fruits, vegetables, grains, and protein, a simple and suitable asset allocation of equities, fixed income, and cash can lead to a more transparent, less confusing and effective investment plan. After all, it has been shown that more than 90% of a portfolio’s return is tied to asset allocation. Put another way, less than 10% is related to individual stock picking and market timing in a diversified portfolio 

Silence The Noise. Constantly plugging into financial news chatter while short-term madness erupts can set off emotional time bombs. This raises the chance of detonating your likelihood of achieving your long-term financial goals. Investment returns over a lifetime will largely be determined by one’s behavior during the volatile times. The market can be a wild, unemotional creature. Fortunately, it can be tamed by unplugging from financial news noise and focusing on historical facts and time horizons. 

Know Your Investment Fees. It’s critical to understand the fees that you pay, both advisory and investment product fees. Even seemingly smaller differences in all-in fees can significantly impact wealth building over time. After all, the money you keep is more important than the money you make.

K.I.S.S. Your Portfolio. Often times, portfolio holdings can proliferate over time as investors place funds, stocks, and other investments into the portfolio mix without a plan. A cluttered portfolio usually results in an unwieldy, confusing hodgepodge of overlapping investments that don’t work effectively together to meet portfolio objectives. This "di-worse-ifying" vs diversifying effort can cause added costs, stress, confusion, and inertia as you become confused as to how all of the investments fit and work together.

Know Where Your Advisor’s Loyalty Belongs.   Understand why your investments are being managed a certain way if they are aligned with your long-term goals and risk tolerance. Also, make sure you know if your financial advisor’s first duty is to you or his or her employer.

“May All Your Troubles Last Only As Long As Your Resolutions”

By setting and periodically following these simple investing building blocks, you can knock out a huge step toward greater financial confidence and, therefore, less investing stress over time. These simple tasks should be assessed and rebalanced at least annually and they can go a long way with building a stronger investing house, brick by brick.

Keep looking forward and enjoy all the bright promise of a New Year.

David Hone, CFA