The Sound Investor Series #30
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Celebrating New Years' lends itself to new starts and plans to get your house in order. Our resolutions range from quitting smoking to making more time for family.

My experience with New Years' resolutions has been fairly positive. I use them to help focus on long-term issues. I think of where I want to be in five or ten years, determine the largest obstacles in my path; and plan how to conquer them.

I strongly recommend a long-term strategy for New Years' financial resolutions. Start by picturing what you want your finances to look like in 5 and 10 years.

Who knows what the future will bring. But I believe most retirees without pension plans will spend the majority of their lives worried about money. This should give everyone pause. Maybe that bigger house with built-in higher spending levels is not needed - maintenance and property taxes are killers. Instead of moving up, perhaps putting more money into your retirement portfolio might be more enjoyable long-term.

Here is something to keep in the back of your mind. If you and your spouse are 65 today and in good health, one of you will probably live into your 90s. To have a reasonable chance that your nest-egg will not run out, some professionals advise spending only 4.5% of your savings in the first year of retirement and increasing that amount for inflation. This means that if you have saved $500,000, your first year withdrawal is only $22,500.

Saving money is the major key to building a successful retirement portfolio. Investing intelligently is also important, but everything starts with a concerted savings program.

A New Year's resolution to "Save More" probably won't cut it. To make it work you have to make it more specific. Come up with a concrete and realistic number of how much you will save. Don't make it too big; or too small.

Saving money is not easy. By definition savers deny themselves immediate pleasures. Major spending decisions should be analyzed within the context of your life-long financial plan, not just on if you can make the monthly payments. It is critical to have a long range plan you and your spouse agree upon. Will that renovation you are considering increase or decrease your long-term happiness? Certainly it might be nice in the short to intermediate term, but will it leave you scrambling for money in the long term.

The good news is that saving money while investing efficiently does work. To get a feel for the power of savings and investing, let's look at a hypothetical 50 year old. If they save and invest $10,000 a year, every year for the next 15 years (until age 65) they will probably have $10,000 to spend in all 30 years of retirement - inflation adjusted, even if they live into their 90s. In other words, every $1 you save consistently EVERY year for the next 15 years; will return about $2 in retirement.

Beyond saving there are a number of investing resolutions you might make. Again don't super-size your resolutions as it is very unlikely you are going to fix everything about your finances in a few months. Most people are somewhat cautious and unwilling or incapable of making big changes. Rather than setting yourself up for failure with grandiose resolutions, plan small, simple steps to get your finances on the right track over time.

Resolve to determine if your portfolio's asset allocation is appropriate. How investments are allocated between stocks, bonds and cash has the greatest effect on how your portfolio performs. This is a complicated question which is impacted by age, health and wealth. My rule of thumb is that all the money you don't think you will need for the next 10 years should be in the broad stock market.

Another good resolution is to find out how your financial adviser or broker makes money on your investments. Everyone has to get paid - there's nothing wrong with that. However, different compensation programs create different incentives for brokers and advisers that investors should understand.

If your portfolio holds individual stocks, resolve to understand why you own each one of them. My experience shows that many investors do not have sound reasons for owning individual stocks. After considering taxes, sell any stocks you do not understand and move the money into safer index products.

Do you currently own a board-based & low-cost ETF or index fund? If not, make a resolution to invest in them the next time you add money to your retirement saving.

Finally, do you own mutual funds with "B" shares? This could be legitimate, but I would recommend you resolve to have a long talk with your broker. Ask why "B" are shares being used and if they the best choice for your portfolio?

Best wishes for a Happy and Prosperous New Year!

Ed Hynes, CFA, is President of Farm Creek based in Rowayton, CT. (203) 838-1025. This series of articles is available at farmcreeksecurities.com. Before putting money in any investment, you should carefully consider your investment objectives; and the risks, charges and expenses of any investment. Past performance is not an indication of future performance and there are risks to investing including the loss of principal. Please contact Farm Creek for a prospectus on any of the funds mentioned.

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