Create a financial strategy for 2016

Many savvy investors have waved goodbye to 2015 and are ready to dive into 2016 with new resolutions and strategies. Some of us, on the other hand, are looking hopefully at the new year while still morosely looking back at 2015’s unfinished investment business. Don’t despair. Often, the hardest part of moving ahead or starting fresh is sorting through the overload of information and multiple possibilities, and identifying the most relevant tasks and goals. Here are a few tips to help you make the most of your money in 2016.

USE YOUR SOCIAL CAPITAL WISELY

Charitable giving in the U.S. suffered tremendously during the Great Recession, and donations are just now returning to pre-crisis levels. Increased demands on the nonprofit sector and charities of all types meant having to do more with less; at the same time, the number of charities competing for donor dollars has multiplied. Don’t let any of your important contributions go to waste by donating to well-meaning organizations that spend inefficiently or pay themselves too much, or worse, don’t fall victim to outright fraud. Give with your heart, but give with a plan. Determine whether your donations should come from cash, directed required distributions from your IRA (if you are older than 70.5), or appreciated securities. Space out giving rather than lumping it all in the final months of the year. Always check out any charity asking for money; we use www.charitywatch.org, www.guidestar.org and www.charitynavigator.org. Local resources like the Community Foundation of the Lowcountry, www.cf-lowcountry.org, will help direct local charitable contributions to projects where they will do the most good.

financial12RAISE YOUR INVESTMENT IQ

Make your monthly and quarterly portfolio reviews meaningful. Go beyond the bottom line and ask what contributed to performance — and what didn’t. Which investments in your portfolio are underperforming their peers and why? When you are offered a new investment, find out its cost in clear and certain terms, as well as how much your broker or agent is getting paid to sell it. It may sound like an impolite question to ask, but it’s not, and it is important for you to know. It’s perfectly OK for someone to be compensated for selling an investment to you, but you should know how much, and how it compares to other alternatives. Learn to say no to hot stock tips, investments that sound too good to be true (they usually are), investment promises and guarantees that aren’t in writing, investments that are expensive, any investment that you don’t really understand and investments that would be hard to sell.

Don’t equate complexity with good portfolio strategy, and don’t mistake the time you spend each month totaling your net worth to the real work of becoming a better investor. Be ruthless in eliminating duplication in your investments. Use time-tested strategies like bond laddering and dollar cost averaging. Make diversification your mantra for any investments that have credit risk, especially individual stocks, and corporate and tax-free municipal bonds. Don’t have more investments than you can comfortably follow and keep track of. Consider reducing expenses by using low-cost index funds instead of more expensive managed mutual funds. While some fund managers earn their fees, a 2015 a study by analysts at Morningstar of the 10-year period ending in 2014 showed actively managed funds lagging their respective index funds in nearly all asset classes.

ALWAYS PUT IT IN WRITING

All too often, the best investment resolutions degenerate into a new start to old habits. One of the best ways to avoid this is a written financial plan, one that will lend continuity and consistency to your investment activity and enable you to identify exactly what you want to accomplish in 2016, with specific and measurable goals. Define each goal with a timeframe, dollar amount saving strategy and desired outcome. For savings goals make, use of features like direct deposits to savings accounts from checking accounts, or auto saving, where a certain amount is moved from checking to savings every time you post a transaction. For investment goals, be sure to include a target asset allocation in your plan. The synergy between asset allocation and portfolio balancing helps to make your portfolio efficient, and not just a collection of purchases.  If your portfolio mix is not conforming to your financial plan, it is time to reassess your allocation strategy — along with your risk tolerance, return expectations and investment preferences. Consider your mix of stocks, bonds and cash, and the balance within each of these areas. Remember, successful investors are not afraid to be a little contrarian from time to time.

REVIEW YOUR RETIREMENT SAVINGS PLAN

Maximum IRA contributions remain at $5,500, ($6,500 if you are 50 or older.) You can plan to max out your 401(k) or 403(b) in 2016 at $18,000, with an additional $6,000 for those 50 and older. Be sure to contribute at least enough to qualify for any matching contributions from your employer. Otherwise, you are shortchanging your retirement fund and simply throwing money away.

If you qualify, weigh the benefits of tax-free accumulation by contributing your after-tax dollars to a Roth IRA. (Remember though, that Roth IRA eligibility phases out for a married couple with modified adjusted gross income of between $184,000 and $194,000.) You may also consider rolling over all or part of your traditional IRA into a Roth. You can do this even if you are retired, or otherwise ineligible for a contributory Roth.

If you have a 401k with pre-tax and after-tax dollars, you should be aware of some important changes in rollover rules that recently took effect. You are now allowed in some circumstances to rollover the pre-tax portion into an IRA and the after-tax portion into a Roth.

financial3REVIEW YOUR RETIREMENT INCOME PLAN

Some important changes in Social Security benefit claiming strategies were put into effect at the end of last year. “File and suspend,” which allowed family members to receive a benefit based on your earning record while your own benefit grows, has been eliminated effective May 1, 2016. However, if you are at full retirement age or older, you can still file and suspend before this date. Another strategy, known as “Restricted Application,” which allows you at full retirement age to file for only your spousal benefit while allowing your own benefit to grow, has also been eliminated. It will still be available only to those who were 62 or older by the end of 2015. One of the most important components of an income plan is to assure income for a surviving spouse. Take time to calculate a surviving spouse income plan for you and your spouse, if relevant. Determine how much would be lost in Social Security and pension income, how much replacement income would be provided by insurance, and how much would be needed from your investments. Remember, a greater withdrawal rate may increase the likelihood of running out of funds or having to limit your lifestyle as you get older.

REDUCE YOUR DEBT

For most families, reducing debt is key to financial security, and this is especially so in retirement, with high-cost credit cards frequently the culprit. Often, a simple exercise in organization and consolidation can make a big difference. With your monthly net income in hand, list all debts, interest rates and monthly payments, and then apply a reasonable portion of the remaining money after paying basic expenses to the debt with the highest interest rate. Make it the first payment you make each month. You can also consider transferring higher-rate balances to lower-rate cards, and taking advantage of special interest rate offers. Be sure to read the fine print, though, since a single late payment can often negate all the special offers and stick you with an uncomfortably high interest rate.

ACCEPT YOUR LIMITATIONS

Investors can think their way into trouble. Be aware of the biases that lead to poor decision-making. One of the most costly to investors is confirmation bias, in which we seek out information that reaffirms our past choices, and reject or discount information that challenges them. Another cardinal investor sin is overconfidence. Believing that we know more than is possible about a stock, a company or the market in general causes us to make all kinds of wrongheaded decisions, including the buying and selling more often, which is almost always costly. A 2009 study by Terrance Odean and his associates at the University of California on individual trading suggested an average annual cost, or performance penalty, of 3.8 percentage points when compared to more passive strategies.

Steven Weber is the senior investment adviser and Gloria Maxfield the director of client services for The Bedminster Group. The Bedminster Group is a registered investment advisor providing investment management, estate, and financial planning services. The information contained herein was obtained from sources considered reliable. Their accuracy cannot be guaranteed. The opinions expressed are solely those of the authors and do not necessarily reflect those from any other source