The New Year traditionally calls for reflection and resolution. We should at least aspire to some thoughtful consideration and hope that we might do better going forward. Accordingly, here are some resolutions for the New Year that we all should be able to agree upon. May we actually fulfill them!
- Demand Simple but Meaningful Honesty. MarketWatch recently ran a piece claiming that “beating the market is easy.” Full Disclosure: I am a MarketWatch contributor. The thrust of the claim focuses upon various sectors and approaches – such as small caps or value – that have beaten the S&P 500 index historically as well as suggesting that investors use leverage and lower fee products. While strictly accurate, the claims are misleadingly so because the comparisons are all of an apples-to-oranges variety. Suggesting that one can readily “beat the market” by taking on more risk via volatility and leverage is hardly a meaningful recommendation for most investors and especially for those – and the target of the article – who are engaged in retirement planning. Moreover, defining “the market” as the S&P 500 and pointing out that various other indexes can and do outperform it historically isn’t very helpful either. For performance measurement to have value, one must use an appropriate measuring stick. Even if (when!) it doesn’t make us look great, let’s offer and demand meaningful honesty.
- Address Issues Head-On. As I have noted repeatedly in this space, our nation faces a serious retirement crisis. Few of us have planned well enough and few of us are saving enough to expect to live a comfortable retirement. These undeniable facts demand that we face some serious personal and policy challenges. The defined contribution landscape – never intended as a stand-alone retirement solution – isn’t working nearly well enough. Some more fundamental and far-reaching choices deserve careful consideration. These include mandatory retirement saving, portable pensions, and comprehensive Social Security and Medicare reforms. What we are doing at present isn’t working. Accordingly, some difficult policy choices we might not otherwise prefer or endorse need to be considered.
- Acknowledge Reality. Our behavioral biases are alarming in their scope and impact. They can be astonishingly difficult to perceive and overcome. Yet because of what’s called the “bias blind spot,” even when we recognize these biases, we tend to think that they apply to others but not to ourselves. For 2013 and beyond, let’s all resolve consciously to try to acknowledge and deal with our biases on a consistent and comprehensive basis.
- Embrace Personal Accountability. Because of our behavioral biases, it’s also easy for us to take credit for our successes while blaming our failures and failings on bad luck. Let’s instead resolve to be accountable for our choices and our actions, even (especially!) when they do not work out well. In one way or another, we would all like to privatize our gains and socialize our losses, take credit for success and blame failure on somebody else. Stop! We all know a lot less than we think.
- Insist on Effectiveness. Too many of our planning and investment choices are based upon ideological commitments of various sorts. Whatever our market “schools,” economic and political preferences and party persuasions, we all tend to act first and ask questions later. Let’s demand instead that the choices we make actually be predicated upon good data and evidence such that what we want to achieve has a reasonable likelihood of actually happening. As the saying goes, we are all entitled to our own opinions, but we are not entitled to our own facts.
- Focus. We are all prone to being distracted by the new, new thing. Being new isn’t necessarily bad, obviously, but it isn’t necessarily good either. A well-researched and supported new idea or approach can be of value – even tremendous value. But at least as often the new thing is a chimera that makes promises it can’t keep. If that object of desire makes bold assurances like easy, huge, safe or revolutionary, be especially wary.
- Develop a Comprehensive Plan (and put it in writing). In the same way having to teach a class on a given subject demands that we understand it really well (and, in my case, always engenders a lot of new research even on subjects I already know), developing a comprehensive plan is a great way to find and establish goals, ideas and priorities. Going through this process goes a long way toward ensuring that the final result will be well thought-out. Moreover, only a clear plan allows for an evaluation of how things are going and thus if any changes are called for. Recent research from Advisor Impact Inc. goes one step further and shows that those who create their plan in written form and include a recitation of how they plan to react when trouble comes are a good bit more likely to deal better with the trouble that inevitably comes. Too many of us let our investment and retirement planning strategies develop haphazardly, virtually guaranteeing that they are not thorough and making the likelihood of inconsistency in goals, purpose and execution astonishingly high. An otherwise great investment plan can readily become a disaster is it doesn’t line up with our understanding, goals, objectives and risk tolerances.
- Set Appropriate Defaults. On a related note, our planning default settings need to be carefully considered and implemented. These can relate to asset allocation, investment type and time horizon. Some good examples follow. When in doubt, lower fees win, passive beats active, manage risk first, simple beats complex, save more, spend less, and this time probably isn’t different.
- Evaluate and Re-evaluate. Every plan, no matter how good, should be subject to regular scrutiny and evaluation. Adjustment based upon new or better evidence is always in order. This process also demands clear goals and targets, both interim and longer-term. Most of us are aware of the Lewis Carroll saying: If you don’t know where you are going, any road will take you there. It’s a great warning. We also need to know where we are at all times for planning to be truly effective.
- Be Willing to Ask for Help. My late father reminded me often of the Abraham Lincoln saying, Better to remain silent and thought a fool than to speak up and remove all doubt. We would all be wise to think more, study more and reflect more while saying and doing less. Similarly, most of us resist asking for help. We all like to think we’re the smartest person in the room even though we would all benefit from asking for help often. None of us knows nearly enough to do it all and to do it all alone. Resolve not to try.
My thanks go out to all of you for reading and for a wonderful year here at Above the Market. I am blessed by your interest and support. May your 2013 be a joyful and prosperous one for each of you.