A year ago, I received a slew of mail from readers wondering what they could have done better in 2015 to improve their investment results. In 2015, in case you don’t recall, the Standard & Poor’s 500 index was down by less than 1 percent, although when one includes reinvested dividends, the broad index managed to eke out a gain.
But most investors owned more than the large stock index; they also had small company and international stocks. Unfortunately, those assets did even worse in 2015. The Russell 2000 Index of small company stocks fell nearly 6 percent and the MSCI Emerging Markets Index was down 17 percent. And while, overall, bonds did OK in 2015, the riskier high-yield positions lost 4.5 percent, and longer-dated corporate credit for investment-grade holdings slid 4.6 percent. In other words, 2015 was a pretty rotten year for diversified investors.
Thankfully, on the heels of that disappointment, we had 2016. U.S. stock indexes delivered the goods — the S&P 500 was up 9.5 percent (12 percent, including dividends); the Russell fared even better, rising 19.5 percent; and high-yield bonds were up by double digits. So what is the lesson of the two years? Over the long term, asset allocation and using low-cost index funds work, but sometimes it doesn’t feel so good to stick to your plan.
Let’s pretend that the person who was worried about 2015 performance decided to alter her asset allocation by dumping her stocks and holding her bonds. Sure, she probably felt great in February, when U.S. stocks had corrected by more than 10 percent amid fears that a recession was on the horizon. But given all of the worries at that time, my bet is she would not have been bold enough to declare that she was ready to jump back into the market. More likely she maintained her position throughout the year, missed the recovery in her stock positions and is now trying to decide what to do next.
There are always times when you feel tempted to act, but as Dan Egan, the director of behavioral finance and investments at robo-adviser Betterment explained to me last year, we all need to “acknowledge that human beings are not always rational” — especially when it comes to investing. (Full disclosure: Betterment is sponsoring a new podcast called “Better Off,” and I am the host. For more information, go to betteroffpodcast.com)
So, if you are the type of person who wants to make a financial resolution, start with this one: I will not muck around with my portfolio and try to time the market. This pledge is concrete and achievable, two of the components necessary to keep any resolution. One way to stop yourself from allowing those darned emotions to prompt you to take action is to put your investing life on autopilot. Start by making sure that you are contributing as much as possible to your retirement account and that you are enrolled in auto-rebalancing. This feature is available at most investment companies, and it ensures that your asset allocation remains in check on a quarterly or annual basis.
Finally, if not mucking around with one’s portfolio and trying to time the market is the most important investor resolution, the corollary is something I referenced earlier: Use index funds! Both professional and retail investors are finally recognizing that, over the long term, active fund managers rarely beat the index funds against which they are measured. Let’s all stop funding the folly of beating the market and get back to the more important financial issues at hand.
Jill Schlesinger, a certified financial planner, is a CBS News business analyst. She welcomes emailed comments and questions.