Avoiding January Investing Mistakes

A new year brings with it many conflicting emotions and actions. For many people, a new year is a time of goal setting. Some people make New Year’s resolutions about things they would like to do differently than in previous years, while others decide to get healthier, start a project they have been putting off or reconnect with old friends or family. The list goes on.

For many of my clients, January is a time to do a financial checkup. I get more requests to meet with clients in January than in any other month. While I’m always a proponent of having these financial meetings, I’ve also noticed that, unfortunately, January is also a time that can lead to wrong investment decisions if we don’t guard against some of the impulses we tend to have this time of year.

Don’t Go Overboard with Financial Review

One of the things that investors do is review the performance of all their investments from the previous year. Human nature is to try to group these investments in terms of “good” or “bad.” Generally speaking, we tend to think of the ones that made the most or lost the least as “good” and consider those that made the least or lost the most “bad.” And just like a bunch of NFL teams that want to fire all their coaches because they didn’t make the playoffs, we have an impulse to fire or sell the “bad” investments.

Managing a successful investment portfolio differs from managing a fantasy football team (or a real-life one). One of the things that we have to fight against is “recency bias.” In simple terms, it means that we expect what has happened recently is what will keep happening in the future. We tend to assume that investments that have performed poorly so far will continue to do so going forward.

In It for The Long Haul

Many people make investment mistakes when it comes to staying in for the long haul. After a year like last year, when many stocks and bonds had a negative year, it’s tempting for someone to think, “Well, I would have been better off if last year had I put my money in a CD.” Then he or she sees that CDs are paying more now than they have in a long time. So, the natural reaction is to sell investments that haven’t been doing well and purchase CDs. Well, guess what? As of this writing, the S&P 500 has returned more in January than someone would make all year in the CD. Now, I’m not saying that everyone should have all their money in the stock market and that people should never own CDs. It’s easy to let recent events influence your behavior if you are not careful.

Most people with long-term investment success can suppress their recency bias and move money from the investments that have had the most recent success to those that have been performing the worst. Let’s say you started the year with a 60% Stock, 30% Bond and 10% Cash mix. Let’s also assume that the stocks and bonds were down last year. At the end of the year, you see that your allocation is now 55% Stock, 25% Bond, and 20% cash. Many times, the best thing to do would be to rebalance your portfolio back to the 60% Stock, 30% Bond and 10% Cash mix. Often, down years in the markets are followed by good years, but most people will not do this type of rebalancing.

Do the Opposite

During January, sometimes we have to bite our lips and channel our inner-George Costanza. There was a popular episode of the show ”Seinfeld” where the character George had a lot of things going wrong in his life, and he had the idea to “do the opposite.” Whatever his natural impulse was in a situation, he would do the opposite. And, of course, his life started getting better. If you have the urge to assume whatever happened in the markets last year will also occur this year, consider channeling your inner George Costanza and “do the opposite.”

January is definitely a time to take stock of the past year, set goals and consider what worked and what didn’t, especially when it comes to your investments. Hopefully, these tips will help you keep any unhealthy impulses at bay as you make your financial plan for the year.

David Jackson, MBA, CFP®, C(K)P™, is the Managing Partner at the Southern Springs Capital Group. For more information on Southern Springs Capital Group, visit www.southernspringscapital.com. Our offices are located at 2555 Meridian Boulevard in Franklin. We can be reached at 615-905-4585.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Southern Springs Capital Group is not a registered broker/dealer and is independent of Raymond James Financial Services.

Any opinions are those of Southern Springs Capital Group and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not indicative of future results. Diversification and asset allocation do not ensure a profit or protect against a loss.

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