As we end 2017, more Americans are working, consumer confidence is climbing, people are handling their debts better and household net worth has risen. Not everyone has their financial problems solved, but a stronger economy provides a favorable backdrop.
It’s also a climate where some people are easing up on their financial discipline and planning, with fewer people making money-oriented resolutions for the coming year.
“Financial resolutions are on the decline because many people are feeling better about their personal financial situation and are generally optimistic about what 2018 will bring,” said Ken Hevert, a retirement senior vice president at Fidelity Investments, which surveys Americans each year on their financial resolutions.
Only 27% of more than 2,000 respondents polled by Fidelity this fall said they plan to make a resolution for the year ahead, down from a recent high of 43% in 2014.
But even if you aren’t fretting as much about financial woes, you likely can identify areas for improvement — and prepare for possible setbacks. Here are some suggested financial resolutions for 2018:
Save more — and better: Saving additional money in the coming year was the top resolution in latest Fidelity’s survey, cited by 55% of respondents, up from 50% in 2016. Paying down debt was next, though that resolution slipped to 25% from 28%.
Among long-term savers, particularly those with goals more than a year out, putting aside more cash in Individual Retirement Accounts or workplace 401(k)-style plans was the top choice, while contributing more to an emergency fund was the main resolution cited by those with short-term saving goals.
Whether long-term or short-term, one of the best ways to save more is to set up some type of automated plan, where the money comes straight out of your paycheck or financial account on a regular basis, so that you don’t think about each decision.
Prepare for volatility: One hazard investors haven’t lost sleep over lately has been a declining stock market. Not only have stocks risen pretty much throughout the year, they haven’t even bounced around much. Barring a late-year collapse, 2017 will go down as a rare year when average stock prices, as represented by companies in the Standard & Poor’s 500 index, traded throughout the year at higher prices than they ended 2016.
Will the positive tailwind continue? Hard to say, but investors should prepare for more volatility ahead, as a more normal backdrop. Wider price fluctuations aren’t necessarily bad but can be hazardous for those investors who respond with knee-jerk reactions. Before engaging in spur-of-the-moment selling, consider how such a response could affect your portfolio, your tax situation and more.
Consider rebalancing: One way to take some emotion out of investing is to rebalance your investment mix from time to time, either on a regular basis (such as at year end) or when your portfolio moves around by a certain amount.
Rebalancing rests on the assumption that you want to maintain a relatively stable investment mix, such as 60% in stocks/stock funds and 40% in bonds/bond funds, broken further into various subcategories. In a year like 2017, when stocks have been hot, you would sell some stocks and channel the proceeds into bonds, to cite a simple example.
“When you rebalance your portfolio, you sell investments at potential highs in the market
and purchase other investments at potential lows,” noted a recent guide to tax and wealth planning by PricewaterhouseCoopers. “Studies have shown that the hot asset classes in a given year seldom repeat or maintain their strong performance.”
Keep an eye on fees: In a year like 2017, when most stocks have been charging ahead, it can be easy to forget about the drag exerted by investment expenses. But expenses are real, and they’re more predictable than investment gains or losses, so investors are wise to keep tabs on them.
There are many types of charges, from annual account fees to various expenses on mutual funds, which are the core holdings in most 401(k)-style accounts. All funds charge an annual management fee and other expenses for accounting, administration, legal, recordkeeping and so on. More-costly portfolios also levy 12b-1 marketing fees and, possibly, “loads” or commissions. These outlays are best avoided.
In 401(k)-style plans, investors on average paid 0.48% in total annual expenses on stock funds in 2016, equivalent to $4.80 for every $1,000 invested, reported the Investment Company Institute. Bond funds were less costly, with a typical expense of 0.35% or $3.50 for every $1,000 invested. But those are averages, meaning you can find individual funds charging less.
Build your foundation first: When the economy improves and markets are rising, investors often get reckless. That’s something to consider now that Bitcoin and other speculative assets are making daily headlines with rapid price appreciation. Time will tell turn whether cryptocurrencies develop into financial mainstays or flame out, but most people would be prudent not to load up on things they don’t understand well.
It’s often wise to structure your investment portfolio as a pyramid, with ample amounts of bank deposits, bonds and other price-stable investments at the bottom and smaller quantities of stocks and riskier assets the further up you go. You can argue about an appropriate structure for your pyramid — maybe the ideal shape looks like a body builder, with more stocks at the shoulder than bonds at the waist.
But the key point is that highly speculative assets such as cryptocurrencies should represent just a small slice. Jay Cutler, chairman of the Securities and Exchange Commission, recently warned of the potential for scams and market manipulation with virtual currencies, which come with minimal investor protections.