I love looking back at the prior year to find lessons I should have learned from the previous twelve months. Maybe it’s just my love of reminiscing, but even if you’re just starting out on your investing journey I think this is a good time to search for ideas to remember later. History often repeats itself, so you’ll be a better saver if you keep in mind some of the pitfalls others may have stumbled over.
This doesn’t just apply to investing. I’m sure you learned from the masters about your craft during your formative years, didn’t you? It’s the same with current events….
Here are my top 3 financial lessons from 2013:
#1 – Don’t Pay Attention To The Media
All year long doom-and-gloom seemed to be just around the corner. As world events unfolded and Washington appeared poised for meltdown after meltdown, if you listened to the media, you probably would have withdrawn any money you’d saved and hidden it under your pillow. As of this writing, the United States stock market is up about 25 percent for the year. Had you moved your money, you would have lost out on some significant gains.
The lesson? Pay attention to your goals, not media hype.
Creative people especially know what I’m talking about with this lesson. While none of us want to compromise our art, at some point, there’s someone in every theater who is only thinking about selling tickets. In the media, magazines need advertising. Television needs ad buyers. Newspapers need subscribers. If you’re going to listen to the media, you should expect a stream of attention grabbing, “MUST READ THIS UNBELIEVABLE STORY RIGHT NOW” headlines.
Why was there doom-and-gloom all year long? Because it sells
#2 – Even Bonds Can Lose Money
People often will describe bonds as a “safe” investment. This year we learned that even “sure things” weren’t always safe. Bonds, which historically haven’t been very volatile, experienced a pretty rotten year. Many long-term bond funds ended the year down double digits.
I think about bonds losing money differently than most. While I expect 2014 to continue to be difficult for the bond market, I’m thinking only about how to buy more. At the very least, I need to remember to stay invested and not panic. Historically, investors sell at rotten times.
At best, I’d like to place more money in this area to take advantage of the downturn. Here’s what’s on my mind: I don’t want to try and time the market, but I should try and keep the percentage of my investments in bonds consistent…even if it means investing more money. So, if I lost 10% of my money that was in my bonds, I want to buy that back while prices are low.
This isn’t a move to load up on bonds….it’s about staying diversified and not chasing last year’s “winners.”
Whatever your art may be, you know that investing in any craft is about diversification. If something isn’t selling, that doesn’t mean that it won’t sell later. By diversifying your efforts, you’re more likely to strike on something that sells than if you place all of your effort behind one approach.
#3 – The Federal Reserve Matters
Much of the reason that the bond market suffered in 2013 was because the Federal Reserve has been buying bonds. While this seems like a good opportunity for investors, the smart money knows that this practice won’t last forever, so investors were in a hurry to sell before the Fed begins their process of selling bonds (or at least discontinuing the buying process).
I know many people who read this blog don’t actively follow the financial markets, but there are a few great phrases to remember. Here’s one: Top investors for a long time have said, “Don’t fight the Fed.” What this means is that you should make sure your actions aren’t the opposite of what the Fed is trying to achieve. Chances are good that you’ll lose this fight.
So, what is the Fed doing? They’re trying to keep interest rates low.
What does this mean for you? It can help you in quite a few ways. Here are three:
- If you have a mortgage and haven’t refinanced to a lower rate, you should do the math and refinance soon. If interest rates begin rising, you may lose out on one of the best opportunities of our lifetime to secure a low long-term interest rate on your debt.
- Buying a car? Look at the interest rate on a loan against paying cash. While I usually don’t like taking out a car loan if possible, they’re so low now that you might not be able to pass up cheap money.
- If you want to eliminate your credit card debt, you may be able to secure a low rate consolidation loan.
I love working with creative people because we’re used to changing gears with the flow much more quickly than the public in general. We know that things change often and to stay on top of our art, we need to be aware of shifting trends. By making sure you know the lessons you should learn from each year, you’ll find that the next year your decision-making is better than ever before.