My 2012 Personal Finance Resolutions

Larry Swedroe is the opposite of your kooky relative who is always giving you unsolicited stock tips. Instead, Swedroe, who blogs for CBS Moneywatch and writes the Wise Investing series of books, consistently offers up calm, reassuring, and avuncular advice.

Swedroe’s new book, Investment Mistakes Even Smart Investors Make (cowritten with RC Balaban) is among his very best. It offers 77(!) dos and don’ts for every investor. The chapters are short but not too breezy, and you can read the book straight through or flip it open and learn a quick lesson. (In fact, it would make a great desk calendar.)

So, I decided to use the book to put together my 2012 personal finance resolutions. Admittedly, some of the items on the list are things I’m already doing, but aren’t those the best kind of resolutions– the ones you can actually keep?

I will not confuse skill and luck (Chapter 7).

Last February, I bought a 30-year US treasury bond for $987. That bond is now worth $1377, a 39.5% gain in less than a year. As much as it pains me to admit it, this is not because I’m a hotshot bond trader. It was pure dumb luck. If I go out and buy more bonds, expecting to sell them for a profit before they mature, the market will laugh and happily take my money.

I will admit my mistakes (Chapter 9).

Because I write about personal finance for a living, I feel extra stupid when I make a dumb money mistake. I haven’t made any serious investing mistakes recently, but I have plenty of time to make them the future. When I do, I hope I can man up and admit my mistake promptly and fix it before it gets worse. (You know, unlike a politician accused of some entertaining lapse of judgment.)

I will not project recent trends indefinitely into the future (Chapter 2).

This has been a good year for me as a writer. But you know those steady-paycheck jobs your grandparents fondly remember from their working years? Freelance writing has never been one of them. I’m tempted to assume that next year will be even better, but it could be much, much worse. So, I’m stepping up my retirement saving and I’m not making any major new purchases or new plans. My current lifestyle is more than adequate.

I will not consider investments in isolation (Chapter 58).

I’ve used this same tired analogy before, but stocks and bonds are chocolate and peanut butter. They work better together. The same goes for US stocks and international stocks. When I buy an investment, I’ll think about how it fits into my whole portfolio, not just how it’s likely to perform on its own.

I will not spend too much time managing my portfolio (Chapter 54).

Okay, I plead guilty to this one. “Investing was never meant to be exciting,” writes Swedroe, “despite what Wall Street and the financial press want you to believe.” (Take that, financial press! Er, wait a minute.) Look, I practice good investment hygiene: I use low-cost, diversified index funds. I also like to play “what-if?” with my asset allocation spreadsheet and I like to check the day’s stock and bond market reports. These are bad habits! The more I look, the more likely I am to get despondent over a few days of bad performance or elated over a roaring bull market, even though this is all money I don’t intend to touch before, say, 2037.

I will remember that stocks are risky, no matter how long you hold them(Chapter 40).

One of the most pernicious myths of investing is the idea that stocks are only risky if you hold onto them for a short time. “Investors know that stocks are always risky,” writes Swedroe. “Long-term investors in the Egyptian, Argentinian, and Japanese stock markets haven’t enjoyed excellent profits,” he points out, “they’ve been ruined.” I own stocks—as diversified as humanly possible—in my portfolio, and I expect they will outperform bonds over the time I hold them. (If I didn’t expect that, I wouldn’t hold any stocks!) However, I’m not putting more money at risk than I can afford to lose and I am prepared (financially and, I hope, emotionally) for the possibility that my stocks will underperform. Which brings me to…

I will have a Plan B (Chapter 76).

Every year after we do our taxes, my wife and I sit down for a financial meeting. We talk about crazy-exciting things like wills and 529 plans. One thing we haven’t done in a while is hold what’s often called a “financial fire drill.” For example, let’s say one of us loses our job or we have a major unexpected expense. Where would the money come from? Where would we cut back? How long could we survive on our savings before having to take more drastic steps? This is the very definition of “no fun,” but having the conversation during an actual financial emergency, as most families do, would be infinitely less fun.