Outside-IN

Five financial resolutions your clients will keep

Clients who get comfortable with uncertainty and various outcomes will be better positioned for success

Jan 3, 2018 @ 1:34 pm

By Patrick Nolan

For many of us, the making — and breaking — of New Years' resolutions is an annual, time-honored tradition. Investment habits almost always make the list. Well-intentioned clients promise that from now on they're going to invest regularly, read their monthly statements and stick to their asset allocation even if stocks are going crazy. Too often, however, these promises go the way of unopened diet books and unused gym memberships.

Why are these relatively easy tasks so hard to execute? More often than not, it's a mindset problem — a way of thinking that blocks our ability to change behaviors that may not be very good for us.

(More: A New Year's resolution that really works)

The following resolutions are subtle but powerful "mental tweaks" that can help clients make smarter decisions all year long. They're drawn from behavioral science and supported by learnings from our discussions with thousands of advisers over the past year and our risk analysis of more than 6,000 adviser portfolios.

1. Accept that I don't have all the answers. While it's good to have convictions, it's also important to recognize that we tend to favor information that reinforces our beliefs. Challenge these confirmation biases by proactively seeking other points of view and really listening. If, for example, you're convinced that interest rates are going to rise (as most investors currently are), find a contrarian and ask him to explain. You may ultimately decide that your position is the right one, but understanding the opposing case may help you identify any weakness in your rationale. That can motivate you to incorporate investments that will work should your thesis be proven wrong (even temporarily).

2. Get comfortable with being uncomfortable. It's hard to make progress without a few missteps. Accepting the reality that losses are part of the process will help you prepare for and ultimately tolerate them better. So while stocks have historically offered the best opportunity for long-term growth, know that it's going to get ugly sometimes. Before it does, pinpoint things that can play defense in that environment — then own them consistently. Yes, they likely aren't the things that align with your thesis, and may make you uncomfortable when they're holding you back month after month. But it's like setting off on a mountain climb with your safety ropes firmly secured. A little cumbersome, perhaps, but you'll be glad you have them when you stumble.

3. Turn off the news and focus on the information that matters to you. Your personal benchmark is a lot more nuanced, and a lot more long-term, than the daily dance of the S&P 500 Index. Keep your eye on whether you'll have enough to spend throughout retirement, or send your children to college. Unlike the headline noise, you're trying to grow your money judiciously — participating in some stock market upside but also being aware of what you can afford to lose. Resolve not to feel jealous when the S&P 500 is making headlines and your portfolio is lagging. It has nothing to do with you.

4. Ask "what if?" more often. This is about stress-testing your portfolio, imagining a range of likely — and unlikely — scenarios that could impede the success of your plan. What if U.S. stocks take a big hit next year? What if they keep climbing? What if inflation rises more quickly than I expected? What if I lose my job or have to stop working? What's "the perfect storm" for my portfolio, and what would I do if it happened? These scenarios may or may not have an impact, but it's important to consider possible pain points, see where you're vulnerable, and be prepared.

5. Change your mind about one big thing this year. The status quo bias is another behavioral trait that may keep you from acting in your best interest. This is a preference to keep things the way they are or stick with an earlier decision, no matter what. For example, it could be tempting to believe that the S&P's performance over the past decade will continue indefinitely, and thus surmise that simply owning U.S. large-cap stocks is the sure pathway to success. That ignores the historical reality of market cycles. Like the confirmation bias, this type of myopia can lead to trouble.

(More: Why your portfolio may have too much equity risk (Hint: It's your bonds))

Ultimately, you'll want to prepare for something new to become the next leader, and be open to making the necessary adjustments to capitalize on it. Chasing last year's winners probably won't work as well as it did last year.

Patrick Nolan is a portfolio strategist at BlackRock's Portfolio Solutions group.

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