New Year’s Resolutions That Will Keep Your 2001 Finances on Track

A year ago tonight, Y2K angst was everyone’s favorite New Year’s lament. Turns out that what we should have been worrying about was Nasdaq-2K.

The army of novice investors who marched into the stock market during the 1990s got a rude awakening this year. The Nasdaq had its worst year ever and the Dow industrials performed like it was 1979.

But having a bad year is no reason to abandon time-tested tenets of investing and money management. If you’re 20 to 50 years old and don’t want to invest hours of your life learning how to play the market like a pro, many of the lessons preached by financial planners over the last 30 years still apply.

Like what? Well, take diversification. Putting all of your money in tech stocks looked pretty smart last year--right up to the point when it started to look really dumb. (See resolution No. 4.)

So here are five New Year’s resolutions for an era of diminished expectations. (And before you say, “Why didn’t somebody tell me all this a year ago?” just remember: They did.)

1. Pay off your credit cards. Period.

There are few investments that can compare with the return of paying off debts that accumulate interest at annual rates ranging from 14% to 25%, as most credit card balances do. If you have money saved up, use it to get rid of this high-rate debt. If you don’t have sufficient savings, look for ways to cut back on your daily expenses so you can rapidly pay off the plastic.

2. Boost your 401(k) contributions.

The only investment that can consistently beat the relative return of paying off credit cards is investing in a 401(k) plan. Generally speaking, you can contribute up to $10,500 per year, or 15% of your salary, whichever is less, and that amount will be taken out of your pay before taxes are figured. As far as the IRS is concerned, you never earned that money. (You will pay tax on all the 401(k) money when you start to withdraw it at retirement. Until then, it’s tax-free.)

Additionally, most companies will match your contributions at a rate ranging from 25 to 100 cents on the dollar. That combination is a sure-fire recipe for rapid accumulation of wealth.

3. Don’t confuse a bull market with brains.

The stellar investment returns of the 1990s made some investors understandably overconfident. After all, even neophytes were earning double-digit returns year after year, even though everyone knows those kinds of returns are not the norm. Your returns were even better? If you know more about Jimmy Buffett than Warren Buffett, you were probably fortunate, not brilliant.

In fact, only a handful of investors have been able to consistently beat the market over long periods. Your chances of becoming one of those few are about the same as your chances of winning the lottery. If you don’t feel that lucky, consider investing through index funds, which aim to meet, not beat, market performance. If you take a more activist approach, at least don’t try to time the market.

4. When all else fails, diversify.

You’re supposed to diversify so everything doesn’t fail--at least not all at once. The idea behind diversification is this: At any given time, most investments will be going up, while a few others will be going down. If you own them all, the value of your total portfolio remains fairly stable, increasing by reasonable but not stunning amounts.

Of course the part that no one likes about diversification is that some of your investments will be losers at any given moment. But, as “dot-com” fans learned this year, if you bet the bank on just one stock or one industry, be prepared to lose big.

5. Pursue goals, not greed.

The tech stock debacle of the last several months wiped out the investments of many a family hoping the high-stakes gamble would result in a bigger home or a more secure future. By putting short-term money into volatile investments, you jeopardize things that are precious.

Remember, money is merely a tool that can provide you with comfort, security and freedom. To use this tool properly, you must first set goals and then determine what type of investments best suit those goals. Short-term goals require safe, short-term investments.

Don’t let the promise of high returns tempt you to plow money you may need next year into the stock market--no matter how mouth-watering the recent returns. Stocks are simply too volatile to finance wants and needs that are only a few years away. If you are uncertain which investments suit which goals, check out http://161.35.110.226/business/invest101 for an investing primer.

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Times staff writer Kathy M. Kristof, author of “Investing 101” (Bloomberg, 2000), welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St. 90012, or e-mail kathy.kristof@latimes.com. For past Personal Finance columns visit The Times’ Web site at http://161.35.110.226/perfin.