Happy New Year! I don’t know about you, but I love the dawn of a new year and all the potential that new beginnings can bring. I usually celebrate by making a long list of over-ambitious resolutions that I then spend the rest of January gradually and depressingly breaking as my initial enthusiasm is ground down by the practicalities of daily life. So, this year, I’m changing my approach.
I’ve just started reading ‘Atomic Habits’ by James Clear, who thinks goal setting is flawed and reckons that systems and habits, not goals, determine success.
Picture this: every runner in a race wants to win, so they all share the same goal. What differentiates the winner is not their goal but their training programme, nutrition, sleep, etc; in other words, their systems and habits.
Applying all this to the investment industry, many funds have similar goals. Fund managers tend to sit somewhere between capital preservation and maximising returns but knowing their objectives does not tell you whether they will achieve them.
Instead, fund selectors attempt to identify the most successful managers by examining their systems. Factors they might look for include a rigorous investment process, extensive research resources, how managers have learned from their years of experience, and whether they demonstrate conviction by investing their money in their funds.
Individual investors may wish to take the new year as an opportunity to reconsider their own approaches. For those seeking inspiration, four of Hargreaves Lansdown’s experts have put forward their resolutions, all of which point towards developing good habits rather than setting specific goals.
First up is Robert Farago, head of strategic asset allocation, whose New Year’s resolution is to “stay humble and stay invested”.
He has read through a plethora of investment outlooks and discovered that fund managers and economists do not agree with one another. “Some think the exceptional performance of US companies will continue, others argue that exceptionally high valuations will weigh them down. Most argue that growth is set to remain robust but a few point to signs of a looming recession,” he observed.
Amidst all these divergent views, Farago has decided to remain humble about his ability to predict the future and hedge his bets.
“Don't double down on yesterday's winners. Don't get scared out of markets by the sirens predicting the next great depression. Understand that investing offers you a long-term return above cash – in return for accepting the risk of losing money in the shorter term. So, stay invested but diversify across different sources of risk and return,” he explained.
His colleague Hal Cook, senior investment analyst, is also taking a humble tack with the resolution “don’t try and be too clever”.
“Stick to your original plan – markets can move quickly and it’s easy to get carried away. Set a plan for an investment before you invest and then stick to it once invested,” Cook said.
Tara Irwin, senior ESG analyst, thinks building resilience into portfolios will be key this year.
“If 2024 has taught us anything, it’s that the world is increasingly unpredictable. Remnants of Covid-19, escalating trade tensions, and extreme weather events have exposed the financial risks of disrupted supply chains, damaged infrastructure, and operational delays,” she said.
“These issues can erode company revenues and investor returns, so my resolution is to prioritise investments in companies that are future-proofing their operations – strengthening supply chains, safeguarding transport routes, and adapting operational hubs to withstand climate and geopolitical risks.”
Finally, senior investment analyst Joseph Hill said investors should think about reinvestment risk.
“Over the past few years, investments like money market funds have become increasingly popular with investors, offering yield for a low level of risk. However, as interest rates fall, as they are expected to in 2025, this exposes you to reinvestment risk – the risk of missing the upside because you’re out of the market,” he explained.
“Equities generally perform well when rates fall. So, waiting for rates to come down before switching from cash or cash proxies back to the stock market will likely mean you miss out on the rally. Remember, over the long term, it pays to be invested.”