It’s that time of year again when we all make our resolutions for the New Year. While you’re at it, let’s add a few financial related resolutions to the list. Unlike some other resolutions you may make, these should be pretty easy to keep.

I will rebalance my portfolios. If you haven’t rebalanced recently you are way overdue. Bonds dramatically outperformed stocks in 2002 and your target ratios have gotten way off center. For example, assuming your investment performance was consistent with the major indices last year, your 60%/40% stock/bond portfolio is now closer to 50%/50%. You may think you’re comfortable with the higher bond exposure but in reality you should be careful, it was that same feeling of "comfort" that caused investors to carry vastly over weighted equity positions when the bubble burst. Bonds have produced double digit returns for three years running now and with interest rates near long time lows it is very unlikely you’ll see anywhere near that performance over the next couple of years. If you follow through on only one resolution this year let this be the one.

I will keep saving and investing. It’s a bitter pill to swallow when you look at your incremental retirement and savings investments of the last three years and realize that you have lost money. That said, realize that the worst thing you can do now is to get discouraged and cut back on this year’s savings and investment. In fact, this is a great time to try to increase it. IRA and 401(k) contribution limits have been raised and you should plan on taking full advantage of them. The advantages of dollar cost averaging, buying more shares of stock with the same dollars, are real. As an example, the $10,000 you put in your IRA in January 2000 would have bought you about 200 shares (split adjusted) of General Electric common. Today, the same $10,000 will buy you 400 shares of GE. While I can’t promise that GE, or the stock market, will go up this year, it certainly is true that there are a lot of good companies that are great bargains relative to three years ago.

I will be realistic in my expectations. We’ve learned that stocks don’t make 20+% returns every year, or even every other year for that matter. Long run returns have historically been closer to 8-10% and will likely continue to be in the future. Don’t get sucked into the trap of chasing "hot" performers only to get killed later. A steady 8% return will generally win longer term. If you have doubts about this, read my December, 2002 Newsletter. This is a game for the long run, get used to it.

I will not second-guess my assumptions. If you have done a decent job laying out a financial plan and setting up some assumptions, stick with them. This is not to say that you shouldn’t review them and make changes as your life changes, you should. However, it is dangerous to adjust your plans to fit the market. If you saw yourself as being "moderately aggressive" in your risk profile two years ago don’t change to a "conservative, preservation of capital" approach now unless your life situation truly warrants it. In most cases risk profiles should be fine tuned at most. It’s tempting to become more conservative after three years of a down market but if you are relatively young your bigger danger is missing out on future market growth, especially now. If you must change your risk profile, only do so after considerable thought and reflection.

New Year’s resolutions are often made and forgotten. This year let’s all make some fundamental financial resolutions that we can keep and benefit from in the coming years. As always, if you have any questions or concerns about this or any other financial matters, please feel free to give me a call. Have a great New Year.

Randy Gridley

January, 2003