NEW YORK (CNN/Money) – Looking for fodder to fuel your New Year's resolutions? Consider some of the object lessons offered by this year's financial events.
From bulls to scandals, and record low interest rates to 10-year highs for long-term unemployment, there have been plenty of reminders of why it's important to keep on top of your financial life.
Here are just four of those lessons:
Make like a bouncer and toss loser funds. Between the still-unfolding market-timing/late-trading scandal and regulators' findings that many firms did not give customers discounts to which they were entitled after they invested large sums in load funds, one thing was made very clear: many mutual fund and brokerage firms were putting their own interests ahead of yours.
But scandal or no, the fact that some fund companies try to make a bigger profit than they deserve at your expense is hardly new. Consider your funds' expense ratios. Every year you fork over a percentage of your assets in a fund to cover management and other fees. And you pay those annual expenses whether the fund does well or poorly.
With all the funds to choose from (many of which are very solid performers with modest fees), the worst thing you can do to your nest egg is throw your money into overpriced, underperforming funds.
Money senior writer Jason Zweig argues that there's no good reason for a fund to charge annual expenses higher than these: for investment-grade bonds, 0.75 percent; for large and mid-size U.S. stocks, 1 percent; for high-yield (junk) bonds, 1 percent; for small U.S. stocks, 1.25 percent; and for foreign stocks, 1.5 percent.
Despite the fund scandal, experts still believe mutual funds can be worthwhile investments since they can provide a cost-efficient way to diversify your holdings and keep them liquid. But they're worthwhile only if you choose the cream of the crop. Besides moderate expenses, click here for other telltale signs that you can trust a fund.
Don't try to time the market. If you felt burned by the bear market and waited on the sidelines this year until the rally in stocks got good and going, chances are you missed out on some of the best parts of the current run-up and when you did get back in, you weren't getting the best prices because you were buying into a rising market.
Year to date through Dec. 5, the Dow has risen more than 18 percent, the S&P 500 has climbed nearly 21 percent and the Nasdaq jumped 45 percent.
So say you had $10,000 that you had pulled from an S&P 500 index fund at the end of 2002 and stuck it in your money market account yielding less than 1 percent. Had the money stayed invested it would have grown to close to $12,100 today, assuming no further contributions.
Rather than basing your investing decisions on fear in a falling market and glee in a good one, you might try a more rational approach.
First, know your time frame. If you need the money within five years it shouldn't be in the market in the first place, said certified financial planner Doug Flynn. But if you don't need it for at least five years you can afford to let it ride out a down cycle in the market. "If you mind the time frame, you'll alleviate 90 percent of your errors," he said.
Second, pick good underlying investments and stay diversified, Flynn said. Diversification can mute your losses when stocks or bonds tumble and keep you well positioned to benefit from subsequent run-ups in a given sector or asset class.
And third, stay informed and think tactically when rebalancing your portfolio, said certified financial planner Rick Applegate. You don't want to be overexposed to a class of securities just as they start to tumble.
A lot of investors in the past few years, for example, sought solace in bonds when stocks were sliding. But when the bond portion of their portfolio swelled beyond their target allocation, they may have been reluctant to take some profit off the table and rebalance their portfolios. If so, they got hit by the volatility that pushed bond prices down this summer, and they may be hit again if interest rates rise, since a rise in rates causes bond prices to fall.
Stashing cash is always a good idea. Even if you didn't lose your job in the past couple of years, news of the unemployed in 2003 was a sobering reminder of how important it is to have an emergency fund.
Of the nearly 9 million people unemployed in the United States, 2 million have been unemployed 27 weeks or more, and in October the number of long-term unemployed hit its highest level in more than a decade. Many have seen their state unemployment benefits expire and the federal extension on those benefits will run out this month.
Such a prolonged period without a paycheck can deplete your resources and force you to tap into long-term assets that are better left untouched, such as your retirement accounts.
That's why financial planning experts always recommend keeping on reserve cash to cover at least three months of expenses, but preferably six when your industry or company is bracing for or undergoing layoffs.
There's nothing like good credit. Record low interest rates were a little bit of heaven for home buyers – or at least those home buyers with good credit.
In June, mortgage rates hit rock bottom. The 30-year fixed for a conforming loan fell to 5.17 percent; the 15-year slid to 4.61 percent; and the 1-year adjustable rate mortgage dropped to 3.34 percent, according to mortgage tracker HSH Associates.
But only about 50 percent of consumers had credit good enough to qualify for such low rates if they were shopping for a home, according to Fair Isaac, creator of the FICO credit score, one of the most widely used by lenders to assess credit risk posed by potential borrowers. (To see how your score can affect your interest rate, click here.)
Your credit score isn't the only factor that determines what kind of rate you'll get, but it's a central one. So make sure yours is the best it can be before applying for a loan. There are several ways to do that, among them:
- Check your credit reports and correct blatant mistakes.
- Pay your bills on time.
- Reduce your credit card balances -- generally, it's good to keep your balances at or below 25 percent of your credit card limit.
- And don't close unused credit card accounts around the time you're applying for a loan since that will increase your balance-to-credit-limit ratio.
(For more, click here.)
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