It could be a while before we see another performance like that of last year's. When all was said and done, the S&P 500 (SNPINDEX:^GSPC) advanced by 29.6% between the year's first open and its final close. It was the best annual stretch since 1997, and the fourth best one in more than four decades.
But here's the question: Did your portfolio advance by a comparable margin? My guess is that it didn't. That at least was my experience. Excluding my and my wife's retirement accounts, the assets in our brokerage account were up by roughly 24%. Was this good? Sure. But it's still less than the broader market.
Carl Richards, author of The Behavior Gap, calls the difference between these two rates (you guessed it) the behavior gap -- that is, between how an individual investor performs and versus the market or some other pertinent benchmark.
Companies like Morningstar and Dalbar have done a bunch of studies that try to quantify the impact of investor behavior on real-life returns. The studies typically compare investors' actual returns in stock funds to the average returns of the funds themselves. Just to be clear, they're trying to compare the returns investors get to the returns investments get.
Is there really a difference? Oh, you bet there is. Typically, the studies find that the returns investors have earned over time are much lower than the returns of the average investment.
Suffice it to say, the objective is at the very least to match the returns of the broader market, if not to beat them. And it's with this in mind that I drew up a list of five investing resolutions that I think investors would be wise to adopt for 2014 and forward.
1. I will save a larger portion of my income
While saving and investing are two different things, they are obviously and intimately interwoven. That is to say, you can't invest unless you have the money saved up to do so.
It's for this reason that any list of investing resolutions (and particularly for beginning and burgeoning investors) would be incomplete without a nod to increasing your portfolio's raw materials.
2. I will not buy on margin
I don't do this, and neither should you. Beyond the fact that buying and owning stocks on margin is expensive, it magnifies losses and reduces flexibility when the market is down by exposing your portfolio to the dreaded margin call.
Yes, it sounds cool and risky to tell your friends and acquaintances that you operate on margin, but investing is about making money, not being cool.
3. I won't chase investment fads
Initial public offerings and other "hot stocks" are fun to talk about at neighborhood parties, but they are often highly detrimental to an investor's returns.
Keep it simple. Reduce stress. Limit yourself to truly outstanding stocks with long track records of treating their shareholders well.
"If investing is entertaining, if you're having fun, then you're probably not making any money," implores billionaire investor George Soros.
4. I won't check my brokerage account more than once a week
If you check your brokerage account regularly, then you're falling prey to emotions and a trading mind-set, not an investing one.
"I buy on the assumption that they could close the market the next day and not reopen it for five years," says Warren Buffett. The point being, it doesn't matter what happens in the market on a day-to-day basis. What matters is the long run.
Choose your stocks and funds carefully and then leave them alone.
5. I won't allow greed or fear to influence my returns
This is the biggest problem most investors encounter. Greed causes us to buy stocks when they're high. Fear then takes over when stocks fall, leading us to sell.
It's important to be cognizant of this.
And remember, over time, there's every reason to believe that the market's general trend is up. It's been that way for more than a century, and it's likely to continue like that for at least the foreseeable future.
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