Investing Resolutions for the New Year

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Resolved: to do a better job managing investments in the New Year.

So, what are the key things to keep in mind?

The most important is that long-standing rules for saving and investing are probably still sound, despite bad experiences of the past decade like the drop in home prices and abysmal stock-market returns. Over the long term, stocks are likely to continue beating bonds and bonds will probably beat cash.

The most important step to growing a nest egg: increase your savings rate. We don’t know for sure that stocks will again return 10% a year, their average for most of the 20th century, but it’s a safe bet that saving more now will leave you with more in 10, 20 or 30 years.

Other key moves:

Diversify

U.S. stocks, measured by the Standard & Poor’s 500, have gained almost nothing over the past decade, but emerging-market stocks have had some stupendous gains — more than 13% a year for the past five years. Most financial advisers say investors should have 10% to 40% of their stock portfolios in foreign issues.

Dollar-cost average

This means investing the same sum at regular intervals, as many people do with monthly 401(k) contributions. This strategy imposes discipline, getting you to invest when prices are down and you are jittery. And a given sum buys more shares when prices are down, fewer when they’re up. Over time, that helps minimize the average price you pay per share.

Minimize fees and taxes

Paying a percentage point or two a year can chew deeply into gains over the decades, as can annual tax bills — especially when investment returns are nothing to brag about. Index-style mutual funds and exchange-traded funds keep fees and taxes to a minimum.

Rebalance

Use an asset-allocation tool to figure the most suitable mix of stocks, bonds and cash, and rebalance your holdings once or twice a year to keep on target. Don’t do it too often, else you rack up commissions and tax bills on moves you quickly reverse as prices fluctuate.

Avoid fads

The big losers of the past decade were investors who thought Internet stocks would keep going up even though the companies made no money, and home buyers who believed house prices could only rise. Price bubbles occur pretty often and are always accompanied by a belief that old rules no longer apply.

Be hard-headed

Successful investors are willing to drop the hammer. They sell both winners and losers when hopes of future gains fade, ignoring how those holdings have done in the past. With every holding, an investor should routinely ask, “Would I buy it today at the current price?” When the answer is no, it’s time to unload.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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