Following a minor hiccup in October, the broad-based S&P 500 has now more than tripled from its 2009 lows. However, questions abound about whether 2015 will be another good year for the global economy and U.S. equities or whether it could resemble the dark days of 2008. Regardless of how well or poorly the stock performs, you can take concrete steps now to set yourself up for success in any economic environment.
With this in mind, we posed a question to three of our top analysts, asking them each for one smart financial move they'd suggest investors make heading into the new year. Here's what they had to say.
Matt Frankel: Improve your credit score
One of the best financial moves you can make this year is to maximize your credit score. While this isn't as obviously beneficial as, say, saving more money or buying good stocks, improving your credit can save you more money than you think.
Even if your credit is "good," you'd be surprised at how much you can save by improving it to "excellent." Let's say you want to buy a house, and your mortgage will be for $250,000. With a "good" FICO score of 690, you can expect an interest rate of about 3.9%, while a borrower with an "excellent" score of 780 could qualify for a rate of just over 3.5%, according to myFICO.com. This may not sound like a big deal, but it's a difference of more than $20,000 in interest over the life of this hypothetical loan.
Aside from paying your bills on time, focus on getting your credit cards paid down as much as possible. "Amounts owed" makes up 30% of your FICO score, so the lower your credit card balances compared to your available credit, the better your score will be. Also try not to apply for too much new credit, as this can also hurt your score.
Finally, if you have any negative items on your credit report, such as collection accounts, make a renewed effort to pay those off. Under the newly implemented FICO scoring changes, paid collections won't hurt your score anymore, and you may be surprised at how much room you have to negotiate a lower payoff amount with your debt collectors.
Sean Williams: Build up an emergency fund
Following a three-and-a-half-year run in the stock market without a true correction, it's quite possible we could be headed for significant volatility in 2015. This could mean another year of great gains, or it could be 2008 all over again.
Regardless of whether the market moves up or down, however, the smart financial move you should consider making in 2015 is to build up your emergency fund.
Americans have a nasty habit of spending most or all of their income when the economy is expanding and only begin to save money when their bargaining power and disposable income disappears during a contraction. A Financial Security Index study released by Bankrate in June on emergency savings showed that 26% of respondents had no emergency fund whatsoever, while another 24% only had enough to cover up to three months' worth of expenses. Less than a quarter had the recommended six months or more of emergency funds available.
With QE3 now over and the U.S. economy as healthy as it's been in years, it's the perfect time to set up or add to an emergency fund so you aren't scrambling for cash when an unexpected expense strikes.
What's the easiest way to establish an emergency fund, you ask? First you have to get acquainted with your cash flow. Once you've established a monthly budget and have a good grasp on your expenses, you'll be able to set aside money each month to build up your emergency fund. The best part is that once you've hit your emergency fund target, you can redirect those savings toward your investment portfolio each month with a budget already firmly in place.
Leo Sun: Don't abuse the "buy" and "sell" buttons
In long-term investing, the best strategy is often to simply do nothing at all. Because stocks never rally in a straight upward line, sticking with fundamentally sound stocks over several years can reap bigger rewards than abruptly selling them.
For example, Walt Disney (NYSE:DIS) stock plunged from around $34 per share in September 2008 to less than $16 the following March. That decline wasn't due to major disruptive threats or fundamental weaknesses; it was caused by the global financial crisis and a fear that Disney's entertainment businesses would buckle in a recessionary environment. Yet panicked investors who dumped Disney missed out on its subsequent recovery and massive rally, which boosted its price to nearly $95. That same "shakeout pattern" can be seen in top stocks like Apple (NASDAQ:AAPL) and Johnson & Johnson (NYSE:JNJ).
When long-term fundamental investors purchase a stock, they should write down their investment thesis and file it. Later, when doubts regarding the stock arise, they should see whether that original bullish case still rings true.
Although the U.S. stock market had a great run in 2014, that doesn't mean investors should start selling stocks in 2015. Instead, they should ride out the volatility, buy the dips, and only sell a stock if the original thesis falls apart.