More than half of Americans plan to reduce debt and increase savings in 2012, according to a survey by TD Ameritrade Holding Corp. To help consumers along, the company came up with its top five financial strategies for the new year.
The first is that investors should keep an eye on their investment portfolios and make adjustments as necessary. The company recommends investors reallocate one-third of their money in January, another third in February and the final third in March. Then continue this pattern of reviewing and/or reallocating one-third of their portfolio each month.
"This strategy helps long-term investors develop good investing habits and avoids the 'set it and forget it' mentality by keeping them constantly engaged in their portfolio," said JJ Kinahan, chief derivatives strategist, TD Ameritrade. "Rather than adjusting their entire portfolio at once, they can adjust one-third of it at a time – so it's still a long-term portfolio that benefits from short-term changes."
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The second tip is to embrace market volatility. The company suggests getting educated about options because "many investors are finding them useful in volatile, flat, up or even down markets."
The third strategy is to be informed about diversification. The economic downturn of 2008 reminded many that worldwide markets are very connected. Diversification is important because if one country's economy fails, it is likely to impact other economies as well. Investors may want to think about diversifying across sectors rather than economies.
The fourth strategy is to pay attention to interest rates. When a 10-year corporate or foreign bond is paying 10 percent or higher at the same time the 10-year U.S. government rates are at 2 percent, investors should understand the reason. Anything that is more than 2 to 3 percent higher than government rates will likely have greater risk associated with it.
The fifth strategy is to watch out for the word "guaranteed." The word "guaranteed" associated with U.S. government bonds refers to the timely payment of principal and interest. The government does not guarantee that the bond itself will not lose value. So investors should be aware that their principal can fluctuate. Investors should do their research and be sure they understand the full risk, as with any investment.
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