The investment side of personal finance is like fly fishing: once you’ve got the cast down, don’t think too hard about it. When you start agonizing over each discrete motion, pretty soon you’ve got a fishhook in your arm. Golf swings and guitar licks fall into that category: practice hard, and when the big moment comes, rely on muscle memory.
Investing doesn’t use muscle memory -- not exactly -- but it does benefit from automated processes that execute that plan. What are the financial equivalents of overthinking your chip shot?
- Checking your fund balances every day, which can lead to stress and, for the average investor, buying and selling at the exact wrong time
- Moving money around too often, which takes it out of the market and triggers unnecessary trading fees
- The worst offense: only purchasing investments manually instead of on an automatic schedule. This gives the investor a moment each week to decide whether to invest or spend their money (guess which they’ll choose).
I’ve been guilty of each of these investment crimes at one time or another. They all share a common thread: by trying to involve myself more, I achieved less. So this year, my resolution is to do less. Buy and sell less. Check my 401(k) balance less. In fact, below I’m going to list the only financial moves I’ll allow myself to make this year.
Check Balances Monthly. Every month, I’m allowed to log into my Vanguard account, my Sharebuilder account, and my company’s 401(k) to check my balances. Quarterly would be better, but I don’t think I’m capable of it. The more I check my balances, the more chance that a big swing will cause me to turn on CNBC and buy into whatever frenzy is being sold that week.
Rebalance Twice. Twice a year, I’m allowed to tally up my investments and rebalance if my funds diverge from my asset allocation. What’s an asset allocation? It’s your ideal mix of investments, the investor’s version of the atomic clock that keeps world time. As the market changes, your investments will drift away from your ideal allocation as some rise and other dip. Rebalancing recalibrates your portfolio back to your ideal investment mix by buying and selling. Don’t have an asset allocation? FutureAdvisor, and other web-based tools, can create one for you.
Create Bi-annual Reports for my Wife. My wife and I recently split financial duties in the household. She handles the day-to-day finances under the fake title Director of Daily Operations. I handle investments and retirement with the prestigious, but equally fake, title, Director of Forward Planning. (If you didn’t know we were nerds, now you do...) Part of making the split responsibilities successful involves keeping each other informed. I do this by creating a short report: it includes our net worth, our investments and their allocations, and whether we are on track for our goals. Just making the report, and knowing I am going to be questioned on it, sharpens my mind and makes me a better planner.
Open a 529 for Daughter #2. My new daughter is only a few months old, but I want to set up her 529 account as quickly as possible. As with all things investing, the best time to start putting money into an account is yesterday. I opened a 529 for my first daughter and it has paid dividends, literally and figuratively. My 529 allows family members to create accounts and easily contribute college money online, and this has led to an upswing in gifts. Something about grandparents having their own account, and knowing that their money is going straight into the 529, makes them feel more comfortable giving. If you can set up one of these, you should. New Hampshire’s plan has a great, low-fee index-fund option, and is open to out-of-state residents.
Have a Plan for Manual Investments. Every once in a while, I might find myself with a few extra dollars. This is not a bad problem to have, but without a plan, I would waste the money. This year I’ve got a plan: I’ll immediately purchase more of the index funds that I already own in my taxable account (a taxable account is just an investment account that is not a retirement account like an IRA or 401(k)). This avoids what I call the Triple Achilles Heel of investing: spending money that should be invested, trying to pick stocks, and trying to time the market by waiting. Studies show that someone at my skill level will not succeed trying to pick stocks or time my investments.
Start Thinking Seriously about Retirement. I’m in my early (OK, mid) thirties, so thinking ‘seriously’ about retirement might seem obsessive. But in my opinion, there are few things more important. The thirties are a great time to graduate out of the ‘accumulation stage’ of retirement planning. During the accumulation phase, the only goal is to accumulate as many assets as possible without thinking much about them.
The next stage is both more fun and more daunting. I get to daydream about my ideal retirement, but I also have to take a hard look at the numbers and determine whether I’m on track to realize my dream. The transition between these two stages is the awkward teenage phase of retirement planning, and that’s where I am right now. Do my wife and I want to travel the world in retirement, or settle down in a small cabin and do Sudoku puzzles? The answer to that question will determine how much we need to save. Remember, your actions should flow from your long-term goals and not the other way around.
Roll Over Old 401(k)s and 403(b)s. I am making a job change soon, and my wife made one recently. Because of this, we have old 401(k)s and 403(b)s from our previous employers. It’s always best to roll these balances over, which is another way of saying move them somewhere else. They can be moved into a current employer’s plan (though watch out for fees if you choose this option) or a low-cost IRA from a financial company like Fidelity or Vanguard. If you don’t roll them over, they’ll become like unloved pets that don’t get the attention they deserve.
However, rolling accounts over is easier said than done. A previous rollover of mine involved a bit of research, a lot of paperwork, and getting signatures from someone who is ‘Medallion Certified,’ which is like a notary public on steroids (your local bank branch may have one). That said, the work is worth it -- to the tune of $25,000 or more -- so I’m setting a goal to roll everything over by mid-year. If you have balances in old 401(k)s, you should, too.
And that’s it. That’s all I’m allowed to do this year. All of my other investment actions – 401(k) contributions, taxable account contributions, 529 buys – all of this will happen automatically with no chance for me to muck it up.
I admit, there’s something that feels wrong about all this. Especially as someone who writes about money, I feel like I should be fiddling with my investments all the time, keeping a constant eye on them, coming up with new and marvelous ideas to share with you, dear reader. And in most areas of life, the more I work, the better results I get. But I have to keep telling myself that finance is the rare area of life where less is more.
Isn’t it time you work less on your finances?