New Year's Investment Resolutions

Every year, as January come around, most of us avail of the opportunity to review the year that has passed and make a list of resolutions to better ourselves in the one to come. While many of these centre on giving up cigarettes or joining a gym, it is equally an ideal time to review your investment strategies, see how they performed and make some new year investment resolutions. Here are six simple resolutions to help review the investing mistakes you may have made over the last year, and move forward in 2008. 1. Keep a rational, long-term approach. The new year provides a perfect time to look back on the performance of your portfolio and ensure that it has been adequate and remains aligned with your long-term goals. While it is an ideal time to reassess your goals, the first step in realising this is of course to make sure that you have defined, long-term investment goals in place. In a previous article on common investor pitfalls, we discussed how short-term financial targets (like raising enough finance to buy a luxury car) can be easy to dismiss, whereas long-term goals (such as achieving a level of financial security or wanting to own a home) are more solid. Another pitfall was poorly defined and vague investment goals, which can often lead to half-hearted efforts to achieve them. So for example aiming to "hold a 1m pension portfolio by 2018" is a much better target than "being rich in ten years". Having defined, rational and long-term goals in place can help you to avoid the mistakes of chasing short-term performance and reduce your propensity to act impulsively when the market swings, which is particularly important in the current environment. Advances in technology and market transparency have given all levels of investors easy and often free access to a range of very useful sources of data and information. But volatile years such as 2007 have also spawned a flood of online sources of buy and sell tips and touts, urging you to abandon your long-term strategies and invest and trade in stocks and funds that offer the promise of "getting rich quick". While a small number of investors have been very successful in timing the market in the short-term, for the majority, a longer term strategy that will see you through the ups and the downs will provide performance more in line with fundamental goals. Rather than trying to find short cuts, successful investment strategies are guided by the basics of regular investing, diversification and other tried and tested rules. Also, simple common sense should remind you that by the time you're hearing about the success of the latest hot stocks or strategies publicly, you will have already likely missed the run-up, and any advantages will be already well embedded in their current prices. 2. Do your due diligence. A good resolution when reassessing your goals (and throughout the year in making any investment decision) is to ensure you always do the necessary due diligence. When considering adding new assets to your portfolio, it is crucial to investigate all the features of the asset, including: information surrounding the industry or market it is in; how the class or individual asset is likely to fare in future economic conditions; what is a good price for them now and in the future (using valuation methods under a range of scenarios); and how they fit into your existing portfolio. Considering new equities for example, it is crucial to research the company and know exactly what business it is in, what it produces and how these goods or services are created, who are its competitors and customers and what are the major risks it faces. You should also research the management team, the CEO and the board, looking at issues such as their past performance, the company's stock option policies, and even who actually sits on the board (is it made up of family and marginally qualified friends for example'). As companies and all assets are dynamic in nature, all the aspects of this due diligence process need to be ongoing throughout the year. When you look back on the decisions you've made in previous years, it may well be that it paid to take someone's advice, but the key going forward is not to take their word for it, and to do your own research and investigations to see if you would come up with the same conclusions. 3. Focus on values not prices. 2007 saw a lot of hype about the opportunities for investors deriving from the volatility that featured in the markets during much of the year. However, one of the biggest mistakes investors can avoid in 2008 is placing too much emphasis on prices and short-term performance and not enough on fundamental values. In conducting a review of your equities for example, if you only look back only at the price performance they achieved in the last 12 months and ignore the underlying values of the companies behind them, it is easy to make very poor investment decisions. For example, a high price achieved throughout the year could easily have been the result of a run of speculative investing. If this price has fallen by the end of the year, it is not always a sign that the company is underperforming. On the other hand, the business itself may have deteriorated from this high due to a variety of 'real' factors, meaning that the fundamental values are actually lower and probably shouldn't be expected to recover any time soon. Sticking to this resolution doesn't mean blinding yourself to potential bargains in the market - and at the moment these do exist caused largely by people selling off their shares in the various waves of panic we saw throughout last year. It simply means that your definition of what constitutes a bargain looks not solely at price, but also at how (and why) this price deviates from fundamental values. 4. Live in the present and look to the future. When trying to value companies or any assets and their potential performance, it is crucial to always do so in the context of the current and future environment, and not where they were last year. Looking forward to 2008 this is a critical resolution to keep up, with factors such as house prices, lending and credit conditions and many company's sales in a very different position than at the start of 2007. It is essential to value your investment assets based on today's fundamentals and not those of the past. A very good practical example of this to keep in mind for the new year is in looking at company's balance sheets while conducting your due diligence. In previous years, when debt was relatively cheap and risk premiums were low, a 'good' balance sheet with only a small amount of debt and leverage might not have been particularly attractive for investors, perhaps indicating a management style that was overly adverse to risk. However in these post credit-crunch times, strong balance sheets have become important again and offer solid downside protection, an attractive strategy in uncertain environments. A related point here is to always look towards future earnings rather than relying on past performance to guide your investment choices. This is one of the most repeated statements in any of the many investor guides and articles that you might come across, and is even quoted in the selling documents for new funds and other instruments, yet remains one of the most ignored. Past returns do not guarantee future success and it is critical to adequately stress test your investments for pessimistic as well as more optimistic future scenarios. 5. Pay attention to both macro and micro conditions. It is a very useful resolution for this and every year to ensure that you pay attention to industry and economic conditions as well as just researching a company or particular asset class. If you are buying equities for example, you are betting on the success of the entire industry and not just that of a particular company or group of companies within it. While many investors hone in on the specific attributes and performance of a company, the fact is that all companies go through different business and product cycles that depend crucially on the overall industry and wider economy. For example looking at property-related assets or financial-based equities over the last year, nearly all investors suffered to some extent at some point during 2007 no matter what specific companies they invested in. While it is a tempting time in 2008 to go 'bottom-fishing' among weaker property or lending companies, even if these companies are currently very cheap, they will still need good fundamentals to survive and make viable additions to your portfolio. Important also to remember is that simply looking for 'hot' industries may not guarantee investment returns either. For example, various green industries are cited as some of the hot investment sectors for the future, however some of these rely on high capital expenditure, require significant re-investment of profits or are even reliant on government intervention for success. These financial and political risks can make some of these stocks already too expensive given potential returns. 6. Take action. Just as we all know that simply buying the gym membership is not going to make you fit, simply knowing that you need to reassess your portfolio and carry out some of the step above is no good unless you go out and do it. You may look back on 2007 and wish you had put your money here or there (or wish you hadn't), but the only way not to repeat these feelings of remorse next year is to take action and follow through on your investment resolutions. For more investment advice signup to the RaboDirect eZine or take a look at the RaboDirect Investor Centre for investment articles. Financial directory