It’s time to make some investing resolutions. The start of a new year is a good opportunity to complete a financial review of the year just passed and see what you’ve accomplished in terms of building your wealth, increasing your net worth and growing your investments. Only then can you consider which financial resolutions will help you achieve your money goals going forward. As the New Year approaches, here are four moves you may want to consider to make for a brighter financial outlook. (For related insight, make an annual financial planning checklist.)
1. Pay Fewer Investment Fees
Fees can be a major detractor from your wealth-building efforts, shrinking your investment earnings over time. Take mutual funds, for example. The fees for mutual funds can add up — whether that's a transaction fee when you buy or sell – which is often referred to as a load – and annual fees that are paid on an ongoing basis. (Read more about keeping brokerage fees from undermining your returns.)
Moving toward the New Year, you have two options for limiting what you’re paying out in fees. The first is to rethink your investment choices. For example, if you’re heavily invested in actively managed mutual funds, you may be able to trim some of the fee fat by opting for passively managed exchange-traded funds (ETFs) or index funds instead.
If you’ve already chosen relatively low-cost funds, but high advisory fees are eating into your earnings, it may be time to think about changing financial advisors. When vetting potential replacement candidates, review the fee structure, their services, and their professional credentials carefully so you understand what they have to offer and what it’s going to cost. (Read more about finding a financial advisor/planner.)
2. Expand Your Portfolio
Diversification is important for insulating your investments against volatility in the market. If your investments are concentrated primarily in one particular asset class, you’re putting the rest of your portfolio at risk if that market sector experiences a downturn. If your investments lack variety, injecting some new blood into your holdings should be on your to-do list.
Real estate, for example, can be a good hedge against fluctuations in the market. If you’re not investing in real estate yet, this could be a great time to consider adding a rental property to your portfolio, since rental rates are expected to rise. As an alternative, investing in a real estate investment trust (REIT) or venturing into real estate crowdfunding could allow you to reap the benefits of owning real estate without actually having to purchase a property. (Read more about how REITs and real estate crowdfunding differ.)
3. Become a Regular Rebalancer
Periodically rebalancing your portfolio helps to ensure that you’re maintaining the right asset allocation to meet your investment goals. The trouble is that all too often investors fail to take a hands-on role in managing their investments, preferring a set-it-and-forget-it approach. On average, more than 75% of the workforce is ever enrolled employer-sponsored 401(k) plans, but only less than a quarter of employees ever make the effort to rebalance their portfolio.
If you haven’t paid much attention to rebalancing in the past, the New Year is an opportunity to change things up. For example, if you normally rebalance once a year, think about increasing that to biannually or quarterly. While you don’t need to review your asset allocation daily (therein lies madness – and the risk of overreacting to minor market changes), you should be keeping a finger on the pulse of what’s happening with your investments. (Read more about why investors need to rebalance their portfolios.)
4. Increase Your Tax Efficiency
Along with management fees, taxes can present another drain on your investments. This typically isn’t something you have to worry about with a qualified retirement plan, such as an employer’s plan or an individual retirement account (IRA). With a 401(k) or traditional IRA, for example, your savings grow tax-deferred and withdrawals after age 59.5 are taxed at your regular income tax rate.
With a taxable investment account, on the other hand, you have to be mindful of triggering the capital-gains tax. This tax applies when you sell an investment for more than what it cost when you purchased it. One way to minimize this tax is to choose tax-efficient investments, such as ETFs or index funds. These kinds of funds have lower turnover compared to actively managed funds, which reduces the frequency of taxable events.
The Bottom Line
These resolutions can be useful if you’re ready to press the reset button on your investment strategy for the New Year. The hardest part about making resolutions is sticking to them, however. To make sure you stay on track, consider how they fit into your larger financial plan.