Resolve to become a better investor in 2012

Fireworks light up Times Square during New year celebration, New York City

Many investors fall into two categories: those who know they don't know enough to make smart decisions; and those who don't know they don't know enough to make smart decisions. The good news is that, despite the messages we receive from many financial providers (and the negative feedback we often receive from the markets), successful investing doesn't need to be complicated. There's no correlation between complexity and performance, and it's rather simple and straightforward to build an investment portfolio that you can hold over the long-term, through thick and thin.

By following just a few basic rules of thumb, you can put yourself on the path to success in 2012.

Focus on expenses. Unless they're Bogleheads, your friends aren't likely to be impressed if you tell them that the fees you pay for your investments are a mere fraction of what most investors pay. Fear not. Study after academic study has confirmed that there there is a direct link between expenses and performance -- pay less, and earn more. If you're paying more than 1 percent for your stock funds or 0.75 percent for your bond funds, you're paying too much and likely costing yourself thousands of dollars over the long term. Resolve to invest more cheaply, using sites like to find less expensive alternatives.

Get your allocation right. A lot of dollars, sweat and tears are spilled because investors allow their emotions to cloud their assessment of their risk tolerance -- they get too optimistic when markets are soaring and too pessimistic when all hell has broken loose. While we'll never have clarity about what the markets have in store, we can count on the fact that over the long term, we'll encounter booming bull markets and soul-crushing bear markets.

How you react to these extremes can make or break your portfolio, so a key to successful investing is finding an asset allocation that you can buy and hold for an extended stretch, one that allows you to sleep at night during the next economic crisis, while also providing you with a reason to smile when the markets are soaring. There's no magic formula that will tell you what your proper allocation is, but the past few years have given us a pretty good taste of what scary stock markets feel like. Resolve to take an honest assessment of your stomach for risk and find an allocation you can stick with.

How accurate are those annual market forecasts?
Top 10 New Year's investing resolutions

Diversify. There's no finer illustration of the importance and benefits of diversification than the bond markets in 2011. Going into the year, the broad consensus was that Treasury bonds should be avoided at all costs, as rising interest rates and inflation would combine to produce terrible returns on intermediate and long-term Treasury debt.

Turns out everyone was wrong. The U.S. economy stumbled, the European Union teetered on the brink of disintegration, and investors all over the world flocked to the safety of Treasury bonds, which produced another year of stellar returns. The lesson is that it's impossible to anticipate what the markets have in store, so invest accordingly. In terms of diversification, it's hard to improve upon a simple three fund portfolio, composed of a total stock market fund, a total bond market fund, and a total international stock market fund. Resolve to invest like you have no idea where the markets are headed in the coming year.

Know when to turn over the keys. We're all different. Some love nothing more than spending hours under the hood of their portfolio, fine-tuning and tweaking it in an effort to make sure it's as efficient as possible. Others find investing as exciting as recaulking the shower, and would be happy if they didn't have to think about their investments for more than an hour a year.

Fortunately, there's no link between success and effort, so if you find yourself in the latter category, consider target date funds. These funds are designed to be single-fund portfolios, owning a broad mix of domestic and international stocks, and bonds. And that mix automatically morphs over time, becoming more conservative as you reach retirement age. They're the ultimate "set it and forget it investment," and the fact that the performance of many of these funds (particularly the lower-cost alternatives) is competitive with that of professionally-run endowments are all the more reason to embrace them. Resolve to build a portfolio that requires the amount of attention you're willing to provide it throughout the year.

Just as there are many roads to Dublin, so are there many different approaches that can lead to investment success. The vast majority of those approaches, however, share the principles described here. By embracing them in 2012, you'll increase the odds that you'll reach your long-term financial destination in fine shape.

  • Nathan Hale

    View all articles by Nathan Hale on CBS MoneyWatch »
    Nathan Hale has spent decades working in the financial services industry, during which he has researched and written extensively about personal investing, the mutual fund industry, and financial services. In this role, he uses a nom de plume because many of his opinions about the mutual fund industry and its practices would not endear him to its participants.