New Year’s resolutions are an age-old custom. Unfortunately, most resolutions are broken within a few weeks of the start of the year. It may be hard to stick to New Year’s resolutions, but advisors should consider resolutions that can help reduce stress and improve investment performance:
1. Go on a “media diet.”
“News junkies” often obsess over the latest headlines. The activity bias is a common behavioral pattern among advisors who find themselves glued to business news during the trading day. Excessive trading can be one of the more damaging investment behaviors, so consuming less business and political news may be a healthy resolution for those who find themselves binging on the latest tweets, broadcasts and articles.
2. Be realistic about political promises.
Government policy is a major factor influencing investment performance. Political rhetoric, particularly in an election year, can create significant market volatility. Political platforms are aspirational in nature, reflecting the preferences of the candidate and the candidate’s supporters. After being elected to public office, however, constraints tend to be the more relevant area of focus for investors.
The trade war between the U.S. and China is a good example of constraints ultimately prevailing over preferences. Although President Donald Trump may have “preferred” to escalate trade disputes with China for the remainder of his first term as president, the risk of higher unemployment and lower economic growth created a constraint that forced him to deviate from his personal preference and declare a truce with China.
The same trade-off between preferences and constraints will be relevant if a Democratic candidate is elected president in 2020. The Green New Deal, Medicare for All or free college education may make for good campaign talking points but will face obstacles that constrain future actions. Advisors should resolve to understand the trade-offs between preferences and constraints, incorporating that understanding into investment decision-making.
3. Spend less time in “echo chambers.”
Confirmation bias is the tendency to seek evidence that supports preexisting beliefs, and to interpret information in a way that supports an existing position. The echo chamber that comes from avoiding contrary viewpoints can lead to costly investment mistakes. Seeking contrary points of view is a necessary step in testing an investment point of view, and an important (albeit uncomfortable) resolution for 2020.
4. Take a critical look at your portfolio.
The new year is a good time to evaluate investment holdings. Advisors should evaluate whether recent winners will have staying power or merely benefited from a favorable market environment. If recent success isn’t sustainable, it may be desirable to look for opportunities to upgrade the holding to an investment with superior prospects.
The same analysis should be applied to less successful positions. Evaluating whether losing positions are likely to recover is a critical aspect of portfolio management. Oftentimes, recent laggards are tomorrow’s leaders.
But some investments that seem cheap today can get a lot cheaper! In an environment in which technology-enabled disruption is ubiquitous, it is important to be vigilant about winning and losing investment holdings.