Welcome to a New Year and our annual roundup of planning suggestions. It isn’t meant to be a one-size-fits-all list. Instead, the idea is to review our broad list of ideas and narrow it down to your personal Top 10 for 2015. Some ideas will speak better to your unique circumstances, needs, and desires than others. Once you’ve identified your personal Top 10, use them to help you reach the goals you’ve set for yourself.
 
The next 12 months will present opportunities for financial progress to those who are prepared and proactive. Will you be ready?

Our lives continue to be transformed by changes in communications technology. Computers have become ever smaller, more portable — even wearable. Making phone calls is just one of many things today’s smart phones enable us to do, and arguably not even the most important anymore. Texting has become a common, faster supplement to — or replacement for — e-mail.

It is all designed to make life easier, more efficient, and in many ways, it has. But taken too far, all of this faster, easier communications technology can leave us living always-on lives. Expectations for what we can get done go up, and so does our stress. Instead of technology serving us, we find ourselves serving technology. If the phone buzzes, it must be checked, even if we’re in the middle of that pleasant throwback to simpler times — a face-to-face conversation.

Simpler times. Many people seem to long for them. How else to explain the popularity of books, magazines, and blogs devoted to simple living?

While we’re about to present many action items designed to help move you toward your most important financial goals in 2015, one overarching suggestion we have for you in the year ahead is to simplify. Unplug from the constant market commentary, unsubscribe from multiple daily e-mail lists, and decide which financial sources you really need to keep up with (we trust SMI will make the cut!).

As Jim Collins suggested in his classic work, Good to Great, a stop-doing list is just as important as a to-do list. The more you can focus on what matters most, and stop focusing on all the rest, the more likely you are to get to where you really want to be.

With that in mind, we present our annual checklist of actionable ideas, based primarily on SMI articles published over the past 12 months. As you read through this article and see ideas that seem particularly applicable to your situation, put a checkmark next to each one (print the article and use the checkboxes). Then, go back through your checked items, and select your Top 10.

After you have compiled your list of 10 items, rank them based on their importance. Some may lead you to set new goals for the year, while others may be important in helping you achieve existing goals.

If you’re married, you and your spouse may find it helpful to go through this process separately at first. Then, compare notes and come to agreement about which objectives are most important and how you will go about pursuing them.

SMI’s “Top 10” approach to planning for the year is intended to be a spiritual exercise as well as a practical one. After all, Scripture clearly conveys that financial matters and spiritual matters are tightly intertwined (Luke 16:10-12). Use this planning time meditatively, thanking the Lord for His faithful provision in the past and expressing your trust in Him for the future. Remind yourself that (1) God is the owner of everything (1 Chron 29:11) and that (2) you are called and empowered to manage His resources for His purposes (Matthew 25:14-30).

In 2015, we pray that you will “honor the Lord with your wealth and the best part of everything you produce” (Prov. 3:9 NLT). It would be our privilege to help you do that.

Above all else…

When Jesus was asked directly what’s most important in life, he summed it up in one of Scripture’s most famous passages.

“Teacher, which is the greatest commandment in the Law?”

Jesus replied: “‘Love the Lord your God with all your heart and with all your soul and with all your mind.’ This is the first and greatest commandment. And the second is like it: ‘Love your neighbor as yourself.’ All the Law and the Prophets hang on these two commandments.” – Matthew 22:36-40

At Sound Mind Investing, that’s why we see investing not as the “end game,” but as a means to the far greater ends of providing for your family (1 Timothy 5:8) and generously investing in God’s work (2 Corinthians 8:7).

 Discover (or ­rediscover) God’s unique plan for your life. Accepting Jesus’ invitation to “Follow me” is not for the faint of heart because it’s not about a life of comfort and ease. Living by faith often involves stepping out of our comfort zone. To be sure, that can feel scary, but in doing so as God directs we  find the adventurous, meaningful life he intends for us. This is a large part of what Paul meant when he challenged us to “take hold of the life that is truly life” (1 Timothy 6:17-19). How do we discover this plan? We ask the One who wrote it. It is through the  cultivation of an active prayer life that we come to know, love, surrender to, and become more like Christ.

 Invest in what matters most. If you have children at home, some of the greatest investments you can make are investments in their character. In 2014, Austin listed several of the specific, biblical parenting suggestions he and Susie received as young parents. While they weren’t always easy to follow — or readily received — the passage of time has revealed their importance and fruitfulness with increasing clarity.

 Keep life’s ups and downs in perspective. We often counsel investors to think long-term, and to not be distracted by the market’s daily gyrations or the breathless commentary of market prognosticators. From a Christian perspective, thinking long-term takes on a unique meaning and can be especially helpful if you are in the midst of a difficult season.

Level 1 – Strengthening your foundation

  Plan your use of money. One of the best ways to start a New Year on the right foot is to  develop a comprehensive, personalized, written financial plan. While such plans will differ from household to household, depending on your life stage, all good plans begin with goals, and there’s no better time of year to set goals than right now. One important part of such a comprehensive financial plan is a plan for managing spending — better known as a budget, or as we prefer, a cash-flow plan. If you don’t have one, this is a great time to  develop a cash-flow plan. Far from the restrictive ball and chain many people envision, a plan leads to a great sense of financial freedom. It’s helpful for all aspects of daily money management, including  navigating the Christmas season with your sanity — and solvency — intact. If you find yourself in the enviable position of having some extra cash flow, consider using it to  speed up the process of paying off your home.

  Live generously. It’s been said before that if someone wanted to know what matters most to us, the best objective sources of information would be our calendar and our checkbook. If someone got a hold of your checkbook, would it be clear that you  make the Lord first in your life? It isn’t that God needs your money; it’s that he wants your heart, and Jesus said our hearts follow our treasure (Matthew 6:21).

The Bible teaches us to  excel in this grace of giving” (2 Corinthians 8:7). Depending on where you are in your journey of generosity, to excel may mean to  begin practicing “exponential generosity.” No matter where you are on the journey, God-honoring giving is joyful giving, and one of the best ways to cultivate that sense of joy is to regularly  consider what you’re thankful for. While tax reasons hopefully are low on your list of what motivates your generosity, it would be poor stewardship to overlook legitimate tax deductions related to charitable giving. And yet, especially when it comes to non-cash donations, that’s exactly what many people do. Thankfully, there are several helpful, free tools available for making credible estimates of what such donations are worth.

  Manage your use of credit wisely. It takes a long time to build a good reputation, but just one misstep to ruin it. The same is true with your financial reputation, which is represented as a three-digit number known as your credit score. It’s important to  know what’s in your credit report because inaccuracies are common and may be negatively affecting your credit score. Checking your credit report can also help you spot possible identity theft, a growing problem as highlighted by massive identity thefts that hit customers of Target, Home Depot, and other retailers in 2014. That’s why, if you’re going to use credit or debit cards, you need to  know how to pay with plastic safely.

  Find the best place for your savings. It’s hard enough to earn anything resembling interest on savings these days. That quest is made harder still by unscrupulous players preying on people’s desperate search for yield.  Be forewarned: advertisements from such players have been appearing in several major city newspapers. If your search for a better interest rate on savings leads you to savings bonds, you’ll likely be disappointed with today’s rates. However, it’s worth looking to  see if you own any unredeemed bonds. The government says billions of dollars worth of bonds are gathering dust in sock drawers (or safe-deposit boxes) throughout the country. Attractive rates in the past may mean such bonds are worth more than you would think!

It gets slightly easier to generate a bit of interest on savings you won’t need to draw on for two years or more.  Consider a short-term bond fund for such savings.

  Keep your healthcare costs under control. One savings-related bright spot is the health savings account (HSA). If you have a high-deductible health insurance plan, you would be wise to  pair it with an HSA. Some savers will find they may even be able to use an HSA to boost their retirement savings. One other option for saving on the high cost of healthcare is to  consider joining a healthcare-sharing ministry. The rollout of the Affordable Care Act has made them even more popular, not just as a way of saving money, but for faith-related reasons as well.

  Manage the high cost of college. If you have kids at home, no one needs to tell you how quickly college costs are rising. One solution may be found by  asking yourself a tough question: Should your child even go to college? For Christian parents, there’s more at stake in the college equation than the cost of tuition or the choice of majors. Your child’s faith may be at stake. So if you are the parent of a college-bound student,  be proactive about fully preparing her or him for the journey ahead.

Level 2: Developing your investing plan

  Recommit to the fundamentals of wise investing. As you review or develop your investing plan for 2015, first and foremost  make sure it is grounded in the truth of God’s Word. Next,  build in safeguards that keep the execution of your plan as rational as possible. That’s not always easy, but SMI tries to help by basing our strategies and specific fund recommendations on objective, mechanical criteria. We’ve made peace with the fact that the future is unknowable, and suggest you do the same.

When the market falls, as it inevitably will, many investors sell in a panic. They then face the confounding decision of when to buy back in, the result being that many stay on the sidelines as the market recovers.  Resolve not to give in to the market-timing fantasy, as even perfect market timing likely wouldn’t boost your returns as much as you think.

The fundamentals of wise investing also include  understanding how fund distributions impact fund share prices. And, while you don’t need to change the way you invest based on this, it can be helpful to  understand how the presidential election cycle tends to impact the market.

  Follow your plan. In the summer of 2014, the Dow closed above 17,000 for the first time in history. That, of course, stirred the play-by-play market commentators to do their thing — some calling for a near-term correction, others setting their sights even higher. The market got especially volatile in October, but then regained its footing and far surpassed that earlier high. As usual, we did our best to keep our heads as others lost theirs, and encouraged you to  stick with your plan.

  Avoid common mistakes. Wise investing involves both great offense and great defense. Both are important. When it comes to playing defense, it’s helpful to learn from those who’ve already made erorrs! In 2014, we looked at a noteworthy study of common “retirement derailers,” reported on a survey of SMI members’ most common investing mistakes, and published our own list of cautionary tales.  Reviewing these articles may help you avoid making bad choices.

  Know where you stand in the actively/passively managed fund debate. In 2014, the heat got turned up in the debate between actively managed vs. passively managed (index) funds. While those in the indexing camp had the upper hand performance-wise in 2014, some seemed to forget an important market reality — these trends tend to be cyclical and often reverse when bear markets approach. Of course, Sound Mind Investing is not opposed to index funds!  One of our core strategies, Just-the-Basics, uses index funds exclusively. We affectionately refer to the approach as “the loser’s game that can make you a winner.”

  Take a closer look at Fund Upgrading. This is our most aggressive core portfolio strategy, and it offers a much different approach to choosing mutual funds than the common approaches backed by conventional wisdom. We don’t grade mutual funds on their long-term track record, awarding them stars or two thumbs up. Nor do we stick with favorite fund managers through thick and thin. What counts in our book is what a fund has done for us lately. That may sound cold, but we believe wise investing is about objective thinking, not warm feelings. And the research bears out the fact that short-term past performance tends to persist, at least into the short-term future. However, Upgrading doesn’t always beat the market. While its fixed asset allocation design is intended to manage risk, if one or more risk categories have an unusually bad year, as was the case with the small-cap and foreign stock categories in 2014, that can significantly diminish the strategy’s performance. Still, Upgrading’s long-term track record remains impressive. And we continue to believe that all five categories, including foreign stocks, warrant a seat at the diversification table.

That isn’t to say we keep our recommended allocations across risk categories the same each year. We don’t. Each year, we weigh the risks and opportunities in each category and sometimes make adjustments. If you’re using Fund Upgrading, be sure to  read this month’s Level 2 and 3 articles to learn about the changes we’re making for 2015. January is also an ideal time to  rebalance your portfolio.

If you’re using Fund Upgrading, keep in mind that it’s fine to  take a simplified approach and buy only the top-ranked fund in each risk category. While our published results are based on an assumption of having money in all four funds per risk category, research we’ve conducted shows that in recent years, an investor who chose just the top-ranked fund per category would have only slightly underperformed one who had money in all four. Although limiting the number of funds in your portfolio will increase your portfolio’s overall risk profile, you still will be fully diversified across risk categories. Make sure you understand how to  use the relative risk scores we publish for each recommended fund as well. They’re designed to serve as an added aid in managing the risk of your portfolio.

  Consider a multi-strategy approach. Remember, you are not limited to just one SMI strategy in managing your portfolio. In fact, one of our most popular 2014 articles looked at the return-boosting/volatility-lowering results of taking a coordinated approach to combining SMI’s best strategies. This approach adds a healthy dose of downside protection to your portfolio, while also broadening your portfolio via exposure to asset classes Upgrading does not use, such as real estate.

  Make informed decisions about your retirement plan. If you’re like most Americans, your retirement will be mostly funded by the contributions you make to a workplace retirement plan and/or an IRA. Few employees, however, are covered by defined-benefit plans anymore. Today’s defined-contribution plans, such as 401(k) or 403(b) plans, leave most of the important decision making to participants. So, be sure you  know how to make the most of your workplace plan. For an increasing number of workers, that includes  making a wise choice between contributing to a traditional or a Roth 401(k). Keep in mind, even if you have relatively few funds to choose from in your workplace plan, you still can  use a form of Fund Upgrading to guide your fund selections with the help of our Personal Portfolio Tracker.

If you have an IRA, or are considering one, you need to  understand your options as well, such as whether you even qualify to make contributions to an IRA, how to best coordinate your use of an IRA with your participation in a workplace plan, and whether to use a traditional or a Roth IRA in order to maximize retirement income.

Level 3: Broadening your portfolio

  Be a student of the market. As we’ve emphasized in the past, the market’s year-end performance numbers tend to mask all the ups and downs that led to that final result. Recent history is no exception.

As you probably recall, 2013 was a great year for investors, and an even better year for Sound Mind Investing members. The overall market delivered a 33.1% gain while Fund Upgrading grew portfolios by 34.5%, even with a healthy foreign stock allocation weighing on returns. Sector Rotation, our high risk and singularly focused strategy, turned in a whopping 65.7% return. How did our new Dynamic Asset Allocation strategy perform in its first year? Just as expected. As we’ve said from the beginning, DAA is a strategy for the risk-averse, offering strong downside protection while sharing in some of an up market’s growth. In 2013, that translated into a solid 16.2% gain.

At the beginning of 2014, many investors’ wondered whether the market could maintain the torrid pace it set in 2013. The first quarter was a bit of a seesaw, but ended in the positive zone, both overall and for all of SMI’s core strategies. We did, however, have to say goodbye to one of the best-performing Sector Rotation funds in the strategy’s history. Our biotech pick delivered a 115% gain in the 25 months we held it! Thankfully, its replacement also shone for the rest of the year.

To a casual observer, the second quarter looked solid for both stocks and bonds. However, there was more to the story, with the small stock Russell 2000 index sliding into correction territory over the six weeks beginning at the start of April, only to come all the way back with a 10% jump by the end of June. Because of the small stock volatility, it’s no surprise that Upgrading lagged the large-stock indexes in Q2. Dynamic Asset Allocation held up well in the second quarter, aided by its one-third allocation to real estate, and Sector Rotation’s new pick came out of the gates hot, with an 18% gain.

Large-company stocks continued to outperform in the third quarter of 2014, while small-company and foreign stocks moved the other way. Even though our mechanical fund selection process put Upgraders in funds that outperformed in four of the strategy’s five stock risk categories, the overall underperformance of three of those categories led to a market-lagging performance for Upgrading in Q3. Dynamic Asset Allocation and Sector Rotation continued to excel.

  Be careful in your quest for yield. Paltry yields dotting the landscape on the lower-risk side of the investing arena left many investors looking beyond the usual suspects. Some likely thought they found the solution after discovering master limited partnerships (MLPs). SMI profiled these complicated investments and offered several cautions. Many MLPs generated positive headlines early in the year with outsize returns, but we pointed to their volatility by highlighting one MLP that lost almost half its value in just one day. As oil prices headed south toward the end of 2014, the yields on certain types of MLPs followed.

  Consider new ways to reduce risk. As the Federal Reserve’s quantitative easing program kept currency printing presses working overtime (at least figuratively), some thought rapid inflation couldn’t be far away. Gold seemed particularly attractive to this crowd. But today, with inflation nowhere to be seen, gold prices are in decline. We prefer to  take predictions off the table when choosing the right investments, and as such, our Dynamic Asset Allocation (DAA) strategy is now our preferred method of determining when to hold gold. In fact, especially among risk-averse investors, DAA is currently our preferred strategy overall. We believe it is simply the best way to own a diversified portfolio.

On the topic of reducing risk, those just getting started with SMI often wonder whether to invest all of their available funds at once or do so a little at a time. The latter approach, more commonly known as  dollar-cost averaging, is a common approach to reduce risk. A more complex method of managing risk is to  pre-set buy/sell instructions for particular investments. Using such advanced tools is not required by any SMI strategy, and if you do decide to use them, it’s essential that you fully understand how they work. Otherwise, they can add risk to your portfolio.

Level 4: Looking toward retirement

  Reconsider retirement-related investment assumptions. Conventional investing wisdom says to reduce exposure to equities as we age. However, new research from two highly respected financial planning researchers came to a surprising conclusion: it is best to reduce equity exposure as we near retirement age, but it’s also best to then begin raising equity exposure. The details are a must-read for anyone nearing or in retirement.

  Reconsider your group affiliations. AARP is certainly the big fish in the pond of organizations for older Americans, but it isn’t the only one, and especially for Christians, it may not be the best one. Fortunately, there are other organizations that focus on serving the unique needs of older Christians.

  Reconsider your gift giving. Many grandparents delight in spending time and money spoiling their grandkids. But in this case, too much of a good thing may not be so good. There are certain types of gifts, though, that are meaningful and memorable.

  Review your life insurance coverage. Life insurance needs change as we age, so a younger person’s needs may be totally different than an older individual. Oftentimes, however, people just stick with what they’ve always owned. Mike Cave’s insights from 30 years in the life insurance business offer helpful points for young people trying to figure out the life insurance landscape, as well as for older readers needing to reassess their needs and present coverage.

  Set your house in order. Imagine that you’ve made all the right financial moves for a long time. You have a solid emergency fund, a sizeable retirement account, adequate life insurance, and more. But if today was your last day, how well prepared would your spouse be to carry on managing your household’s finances? If that thought gives you pause, consider going through the Set Your House in Order course from Compass–Finances God’s Way.

  Understand your Social Security options. Some of the most important retirement funding decisions you’ll make have to do with claiming Social Security benefits. Because women tend to live longer than men, getting these decisions right — including how to best coordinate benefits with a spouse — is especially important for them. Make sure you know the essentials.

  Save on taxes while helping a favorite charity. You can do that by donating an appreciated asset, and with solid stock market gains the past couple of years, you may be in a great position to make such a donation. For retirees who want to take this idea one step further,  consider a Charitable Gift Annuity. It could help you save on taxes while helping a favorite charity, plus provide you with a steady income stream.

Another type of annuity worth considering is  a deferred income annuity. It’s a relatively low-cost way of protecting against the financial risks of living an especially long life.

  Watch out for fraudsters. You might think that with highly publicized financial frauds, such as the one perpetuated by Bernie Madoff, there wouldn’t be many fraudsters plying their trade anymore. But there are. New Ponzi schemes are discovered almost every week. To protect yourself from fraud, be aware of the most common types.

  Review your Medicare coverage. If you’re Medicare eligible, each fall brings an opportunity to review your coverage and, if desired, make changes. Knowing how Medicare’s annual open enrollment season works can help you find a plan with the best benefits for you.

  Finish well. There’s a lot of focus in our culture (and in this newsletter!) on retirement. And for good reason. This is one investment goal where a person doesn’t get a second chance. Still, it’s important to consider more than the financial aspects of retirement planning. Also give careful consideration to what you will actually do in your “golden years.”

Conclusion

Remember our suggestion as we began this article: make this a year of simplifying your life. Our newly designed website was built largely with simplicity in mind. We want it to be as easy as possible for you to understand and execute our strategies, and to learn what you need to know about investing — not everything there is to know.

So, choose just the Top 10 ideas you sense would make the biggest difference in moving you toward the future God is calling you to. Then focus on those, casting aside all of the distractions that may get in the way.

Our prayer for you this year is that you will become ever more faithful in your management of the financial resources the Lord has entrusted to your care, and that in doing so you will draw ever closer to Him.

Happy New Year!