Research shows that most resolutions fail within weeks of Big Ben’s bongs. Given our third lockdown, we’d be forgiven for them falling by the wayside even earlier than that.
Resolutions typically fail because they are either unrealistic in the first place or represent too much “stick” and not enough “carrot”. The beauty of making financial pledges is that they can rapidly become very rewarding indeed.
So, let’s dive in and explore some resolutions that are all about making you richer in 2021 and beyond.
Develop emotional intelligence around your wealth
Some might say you should aim take the emotion out of money matters. I totally disagree. It is impossible for a start, since money is a symbol of hopes, dreams and, yes, fears. Nor should you try to take feelings out of the equation since they are such powerful motivators to action: we are all investing for something.
Rather than try to eliminate emotion, it’s a matter of developing high awareness of your particular profile (your financial personality, if you will) and ensuring your wealth is managed in line with that. Emotional, knee-jerk investment decisions are thought to cost investors 3% in returns a year, so you have to do everything you can to battle those. Then, look to harness your feelings around money so they work for your wealth.
Be realistic - and nuanced - about risk
Developing a good sense of your emotional drivers will help you really explore your attitude to risk. This is not a simple matter of being assigned a “number” after a tick-box exercise that then sticks with you for life. Today’s leading wealth managers use a sophisticated combination of incisive questioning and modelling to generate a really nuanced picture. They also know how dynamic risk-profile is, and will seek to reassess you upon any change in circumstances. Don’t settle for cursory assessments.
This year has schooled many investors (and particularly self-directed ones) on how much risk they can really take on, in both a financial and emotional sense. A sensible approach isn’t necessarily all about dialling down, however, despite a bruising year perhaps making that feel right. You may need to increase exposure a little so as not to imperil meeting your goals. There are many facets to risk.
Seeing (too much) safety in cash
Research shows that a huge flight to cash has taken place over this crisis, with hundreds of thousands of Britons pulling money from the markets and still staying on the side lines. In a world of rock-bottom interest rates and a strong possibility of inflation, remaining overweight cash could see your wealth eroded at an alarming rate.
We certainly need to keep sufficient cash buffers to be able to ride out storms like we’ve seen over 2020, rather than being forced to sell investments to meet liabilities at entirely the wrong time. But going above a sensible level can be anything but safe when foregone returns are factored in. Be mindful about the amount of cash in your portfolio, rather than letting it become a default.
Don’t be afraid to dive into the detail
ARQ’s mission is to help investors know where they stand and see where they could be. That means getting granular on all the levers you can pull to make your wealth grow as powerfully as it can. Comparing performance against the peer group is clearly paramount, but so is trimming costs wherever you can too.
You need to get beyond headline management fees to appreciate the Total Expense Ratio for running your money, seeing performance only as net of all fees and costs. Making even slight improvements on either performance or costs (or ideally both) will really add up over the years. Allowing small differences to slide because of inertia or trusting too much may be a very common mistake, but be under no illusions about how dearly this can cost you. With our tools, there needn’t be much work involved and you can think of diving into the detail as essentially paying yourself.
I’m as guilty as anyone of making grand resolutions that are doomed to fail. Targeting manageable changes to improve the health of your wealth may be a more realistic and rewarding goal.
We’re looking at many weeks more with extra time for contemplation and planning. Make sure you profit from it.