New Year’s Resolutions: Creating long-term behaviors to achieve financial success

Dollar Clock

Setting resolutions for the New Year is a popular tradition. While it is always commendable to change our behavior for the better, it is also common to break those resolutions within a few days or weeks. At Fort Pitt Capital Group, we support investors and consumers who want to set financial goals for 2016. Rather than offering a checklist of common financial resolutions, we thought we would encourage you to take a deeper look at the perspectives behind the behaviors, so you can foster durable, long-lasting changes that can help you improve your lifestyle and finances. Here are a few fundamental changes that can foster greater control in your life and better money-making decisions.

Change how you spend

This is the one area in your finances over which you have almost complete control. So what to do? First, review your purchases in terms of “wants and needs.” Recognize that is all too easy to confuse something you “really, really want” with something you actually need. Looking back at some of the “wants” you had to have, you will quickly realize that most of them were not wise purchases. Like any other “appetite,” your “wants” will grow as you feed them.

Second, take an honest look at your spending patterns, and begin to monitor expenses.

Third, if you want a really effective and easy way to identify wants and needs — consider using only cash for the next month or so. Studies have found that relying on cash rather than using debit or credit cards can help to quickly curb the desire to spend. This may be the natural consequence of watching your cash gradually diminish. Whatever the reason, this approach works.

Fourth, you will also want to review your discretionary expenses and your auto-pay expenses (magazine subscriptions, etc.). Make sure that they still serve the intended need; if not, change or eliminate them. Freeing up discretionary income can help you to quickly build extra savings, which can inspire you to continue down a path of learning to live within your means and without anxiety.

Change how you save

Set up automatic pre-tax contributions to your retirement plan. Yes, it is an inconvenience to have to live on less — but do it anyway. You will find that you eventually “forget” about this money and learn to live well enough on the remainder. Not only does this “force” you to learn to live on less, it also helps to build the wealth you will need during retirement. This is critical since your retirement will be the most expensive thing you ever “buy.” It will cost more than all of the homes and cars you are likely to buy – combined.

The younger you are, the more important this is; even the smallest contributions will have the potential to grow by many multiples before you retire. Making contributions to your retirement account – and to other savings efforts – as automatic as possible is essential to your financial success. Recognizing that you will need this money in the future and then “forgetting about it” (that is, learning to live on the rest) can help you become a successful saver . . . and, potentially, a successful investor.

Change how you invest

Investing behaviors can be hard to modify – mostly because the market evokes behaviors that are deeply rooted in survival responses. There are, however, some choices we can make at more considered, less anxious times that can help you to set yourself up for success.

  • First, make sure you recognize how long your investments will remain invested. If you are not planning to retire for 20 years, you really don’t need to worry about market volatility. If you are already retired, understand that some portion of your portfolio will likely remain invested for a long time. Understanding this helps you to endure the short-term drops in the stock market – even sharp declines – that are the “price” of the long-term returns you want.
  • Second, prudently diversify among different sectors and asset classes. There will be years where this doesn’t seem to work. Over time, however, it protects you from one of the most consistently destructive things you can do — namely, “chase returns.” “Chasing returns” means selecting the investments that have done well recently. We believe that this is always a mistake. Consider the person who bought “tech stocks” in 1999, or real estate in 2007, or gold in 2009, or sold stocks in 2009 . . . the results were horrible. Remember that in the stock market, “popular,” is another word for “expensive.” Having a diversified strategy can help you to hedge against this risk.
  • Third, remember to keep your emotions in check – especially fear. Fear is one of the most powerful influences on behavior and one of the most effective means for moving us to act. Politicians know this and use it every election cycle (no matter what they say about running a “positive campaign”). It is important to recognize that fear is essentially a survival mechanism, designed to “override” our reason and move us to act. When fear becomes acute, you may need to turn off the “amplifiers” – news headlines, TV experts and social media – to avoid yielding to fear. (Remember: the media needs the largest audience possible in order to make money and nothing draws attention like fear. And they know this.) It can help to recall, too, the compelling trends to which people yielded (a few of which are listed above) – to their detriment. Recognize that storms will happen on your journey, but stay the course. You will be rewarded.

As an investor, your patience will be tested – many times – but it is absolutely critical to guard against reacting to “the mood of the moment.” As the three points above illustrate: reacting almost never ends well. Define a clear course and then stick to it. Focusing on your long-term strategy will be much more effective than reacting to short-term trends. The key is to focus on the long-term view and detach yourself from any outside factors that would influence short-term behavior.

Change you how evaluate

It is easy to compare yourself – or your portfolio – against whatever happens to be garnering attention at the moment. Easy, but not helpful.

Your success or failure is not based on what “the market” is doing…it’s based on what YOU need to do. Believe it or not, it does not matter if you are getting the “best possible returns” or not. Some years you will; many years you won’t. What performs best one year may well be the worst holding a few years later.

Getting the “best return” every year is not possible – especially if you have a diversified portfolio – nor is it desirable. Trying to do so requires a willingness to bet all or most of the portfolio on what you think will do best. The problem is: no one – NO ONE – can time the market. More importantly, a prudently diversified portfolio means that some parts of your portfolio will NOT be doing well. This is okay: if your entire portfolio does well in one season, it might all fail in another. Like a well-planned garden, you want to have something you can harvest every season.

If you will pardon the mixed metaphor: what matters then is not hitting a home run on every swing, but getting the runs you need, meeting your own personal goals. Success in life is measured largely in terms of what you need to achieve to reach your goals – not on what happens to be the best in every category each year. People at the gym who measure themselves against an athlete, model or movie star are setting themselves up for misery – and missing the health they could acquire. Folks who compare their clothes, or car, or home, against “the best” on display in the magazines will be perpetually unhappy – even though their clothes, car or home may be exactly what they need. When you look at your portfolio, remember that what truly matters is that you are on track to realize your unique goals.

If you change how you evaluate and refuse to compare yourself (or your portfolio against) against “the best” of the moment, choosing instead to focus on your own needs and goals, success becomes attainable. Indeed, you might achieve more than you thought possible.

Nathan Boxx, Bradley Newman, Jason Seltzer

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