I publish an updated version of my New Year “investor” resolutions yearly. The purpose of the process is to take an annual inventory of what I did and did not do over the last year to improve my portfolio management practices. As with all resolutions made at the beginning of a new year, it is not uncommon to fall short of my goals.
Here is a good example of the importance of keeping resolutions. Early in my career, I built health and fitness facilities. But have you ever wondered why you couldn’t just go into a gym and pay a fee to use it? It’s because the fitness industry gets built around a simple premise – you will sign up for a membership and never use it. So, the membership fee continues to hit your credit card every month. Yet, you don’t cancel the membership because you feel guilty about not starting your diet and workout program.
But you promise yourself you will start tomorrow.
Fitness facilities can continually oversell their gym capacity because many members sign up but never show up. Like going to the gym, resolutions to eat better, sleep more, work out, etc., all sound great. However, while we know we should do them, we don’t.
Such is why America is the most obese country on the planet.
Why am I telling you this? Because investor resolutions are just as hard to follow.
Why We Continue To Repeat Our Mistakes
Every year, Dalbar Research publishes an extensive study that repeatedly shows three primary reasons for investor failure.
The key issues are a lack of capital to invest and psychology. Dalbar defined nine of the irrational investment behavioral biases specifically:
- Loss Aversion – The fear of loss leads to a withdrawal of capital at the worst possible time, also known as “panic selling.”
- Narrow Framing – Making decisions about one part of the portfolio without considering the effects on the total.
- Anchoring – The process of remaining focused on what happened previously and not adapting to a changing market.
- Mental Accounting – Separating the performance of investments mentally to justify success and failure.
- Lack of Diversification – Believing a portfolio is diversified when, in fact, it is a highly correlated pool of assets.
- Herding– Following what everyone else is doing. This leads to “buy high/sell low.”
- Regret – Not performing a necessary action due to regret over a previous failure.
- Media Response – The media has a bias to optimism to sell products from advertisers and attract view/readership.
- Optimism – Overly optimistic assumptions lead to rather dramatic reversions when met with reality.
The “herding effect” and “loss aversion” are the most significant behaviors that compound investor mistakes over time. As markets rise, individuals believe the current price trend will continue indefinitely. The longer the rising trend lasts, the more ingrained the belief becomes. Eventually, the last of the “holdouts” finally “buy in” as the market evolves into a “euphoric state.”
As markets decline, there is a slow realization that “this decline” is not a “buy-the-dip” opportunity. As losses mount, the need to “avert loss” begins to mount until individuals seek to “avert further loss” by selling.
We know we should, but there are many psychological reasons we don’t.
This behavioral trend runs counter-intuitive to the “buy low/sell high” investment rule.
Investor Resolutions For 2025
So, understanding that our emotions tend to precede poor investment decisions, here are the resolutions I try to follow to help me be a better investor and portfolio manager.
In 2025, I will (or attempt to):
- Do more of what is working and less of what isn’t.
- Remember that the “Trend Is My Friend.”
- Be either bullish or bearish, but not “hoggish.” (Hogs get slaughtered)
- Remember, it is “Okay” to pay taxes.
- Maximize profits by staging my buys, working orders, and getting the best price.
- Look to buy damaged opportunities, not damaged investments.
- Diversify to control my risk.
- Control my risk by always having pre-determined sell levels and stop-losses.
- Do my homework. I will do my homework. I will do my homework.
- Not allow panic to influence my buy/sell decisions.
- Remember that “cash” is for winners.
- Expect, but not fear, corrections.
- Expect to be wrong, and I will correct errors quickly.
- Check “hope” at the door.
- Be flexible.
- I will have the patience to allow my discipline and strategy to work.
- I will turn off the television, get off YouTube, stop scrolling TikTok, and focus on my analysis.
These are the same resolutions I attempt to follow every year.
In investing, just as in life, I won’t get into shape because I bought a gym membership or lose weight because I subscribed to a “diet app” on my phone.
I have to go to the gym and stick to my diet.
There is no shortcut to being a successful investor. Only the basic rules, discipline, and focus are required to succeed long-term.
If I want to be a better investor, I have to follow my resolutions.
A Year Of Challenges
As I recently discussed in “Predictions For 2025,” every analyst is optimistic about the new year. Expectations are high for continued economic growth, increased earnings, spending, and S&P 500 price targets between 6400 and 7000 by year-end.
Maybe that will be the case. However, as valuations have become more extreme, the consistently bullish media continue to invent rationales for higher stock prices. While those rationalizations have appeared correct, the surge in market prices was primarily due to the ongoing flood of monetary and fiscal policy during the last four years.
However, things are now changing. The Federal Reserve is cutting rates, albeit slowly, while still reducing its balance sheet. Bank reserves are declining, and interest rates remain elevated, putting pressure on a highly indebted consumer.
With valuations significantly elevated, any shortfall in earnings growth, economic recovery, or decline in Government spending could immediately and negatively impact investors.
The biggest problem for investors is the bull market itself.
When the “bull is running,” we believe we are more intelligent and better than we are. As a result, we take on substantially more risk than we realize as we continue to chase market returns and allow “greed” to displace our rational logic. Like gambling, success breeds overconfidence as the rising tide disguises our investment mistakes.
Unfortunately, after the completion of the full market cycle, our errors return to haunt us—always too painfully and tragically, as the loss of capital exceeds our capability to “hold on for the long term.”
Conclusion
While most financial media and blogs suggest that investors should only “buy and hold” for the long term, the reality of capital destruction during significant market declines is a far more pernicious issue.
With market valuations elevated, leverage high, and bullish sentiment soaring; you should consider constructing your own set of investor resolutions for 2025. The weight of evidence suggests that despite ongoing “bullish calls” for the markets in the year ahead, there is a risk of disappointment
Of course, the biggest mistake we all make is “waiting to start our resolutions” in the first place.
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