As we turn the calendar to 2025, investors should consider making New Year’s resolutions to lead a healthier investment life in the coming year. Here are some ideas:
1. Consume less news about your investments
A “media diet” can help reduce investors’ stress about the day-to-day market swings. Being overly sensitive to the latest headlines can lead to an “activity bias” of trading too much. Investors should aspire to a healthy balance between being well-informed and being overly stimulated by market news.
“Confirmation bias,” which is the tendency to seek opinions that align with one’s own, is another behavioral peril to avoid. The best investors seek out opposing opinions to test their investment decisions.
2. Don’t let taxes dictate your investment decisions
The bull market in stocks has created significant gains, particularly for investors who own some of the big winners of recent years. Many investors are reluctant to take gains in their winners, frozen by the desire to avoid paying capital gains tax.
Taxes can be an obstacle to investment success if tax avoidance overrides an investor’s judgment about the prospects for the stock. It is important to evaluate whether recent winners will sustain success and to consider taking gains if the stock is unlikely to repeat prior success.
Investors should look for opportunities to offset losses with gains throughout the year and not just at year-end; investors should also look for losses in less obvious parts of a portfolio, such as in fixed-income holdings.
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3. Remember that fundamentals outweigh politics
Although government policy is undeniably important, earnings growth, profit margins and valuations typically have a greater influence on stock market returns. Policy can help or hurt individual companies. Well-run companies benefiting from strong demand for their products and services can overcome higher taxes or regulatory burdens, but favorable government policy won’t necessarily be enough to rescue poorly run companies facing weak demand.
4. Plan a budget and asset allocation to look longer term
Most investors focus on a relatively short-term time horizon, with the early part of the new year dominated by prognostications for the year ahead. Focusing on the short term leads investors to stray from sound long-term asset allocation planning.
Investors should design a portfolio with long-term financial goals in mind, recognizing that goals typically are multiyear in nature. Investors should start the asset allocation process by identifying what financial goals they hope to achieve, what amounts will be needed to meet those goals and the timing of anticipated cash needs. Plans made with the best of intentions are often disrupted by unexpected surprises, such as medical emergencies or storm damage, so investors should set aside enough in cash or liquid investments to provide a cushion for unanticipated needs.
5. Expand your research network
Many industry leaders provide sound advice about how to be a more effective investor. For example, Howard Marks, co-founder and co-chairman of Oaktree Capital Management, is known for his thoughtful memos about different aspects of investing. His memos are informed by his decades of investing and are readable and helpful for novice investors as well as experienced investment professionals. Michael Cembalest, the chairman of Market and Investment Strategy for J.P. Morgan Asset Management, writes informative Eye on the Market articles on a wide range of investment and economic topics. Cembalest’s work is well-researched, often entertaining and informative.
Investors who start the new year resolving to lead a “healthier” investment life may have a more prosperous and calmer 2025.
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