A Written Plan is the Key to
Long-term Investing Success
By Austin Pryor and Joseph Slife
© Sound Mind Investing | January 2010
Plan first, then invest. This principle is basic to the SMI philosophy. It's such a crucial concept that we covered it in the opening pages of the Sound Mind Investing Handbook:
To find peace of mind in your investment decisions, you need to become an initiator rather than a responder. Initiators have a concrete game plan in mind. They have made the effort to develop a strategy that specifically takes into account both their long-term financial goals as well as their own personal investment temperament. It is shaped around what they hope to accomplish in the future, and it fits who they are "inside."
Make it your goal to become an initiator! Be like a shopper at the food market who buys only those ingredients needed to prepare a specific recipe. Before she goes to the supermarket, Cindy knows what she is looking for. When she is confronted with special promotions for products that aren't on her shopping list, she readily passes them by. Cindy won't need to spend any time considering whether to buy them because her shopping is purposeful. Similarly, before you begin to invest, put together a long-term strategy that takes into account the risk of loss you can comfortably carry both financially and emotionally and let it guide your decision-making.
In other words, your investing decisions should be made on the basis of a personalized strategy. Furthermore, your plan should be in writing. If your intentions aren't in black and white, with specifics spelled out, you're probably not as committed as you think you are.
After all, who would you say is more likely to realize his dream of taking the family (grown kids and spouses, all the grandkids, the whole clan!) to Bermuda for a two-week vacation: Jack, who says he has every intention of doing it someday, or Tom, who talks about doing it in 2013 and can show you the cost estimates he's collected and the written savings plan he's following that's going to pay for it all?
AN EXAMPLE: TRANSITIONING TO LEVEL 4
Let's apply this "write it down" approach to a specific task many Level 3 readers will be ready for in 2010: making the transition from SMI's "getting started" portfolios to our more-diversified Level 4 Upgrading strategy.
We'll assume your investment account has grown from humble beginnings and now exceeds $25,000. In the SMI scheme of things, this is when we recommend moving to Level 4. (There's nothing special about the $25,000 mark. We picked that amount simply because it's enough to allow you to allocate your portfolio among several funds while still meeting their individual minimum-investment requirements.)
So, our task is to move from Level 3 to Level 4 and set up an Upgrading portfolio based on your risk tolerance and season of life. Let's assume you've been using our Level 3 indexing strategy and currently have your investments with Vanguard. For Level 4 Upgrading, you'll first need to choose a broker. We'll use Charles Schwab for this illustration. Here's the step-by-step plan (these steps apply to non-retirement accounts; for information on transferring a traditional or Roth IRA from one company to another, see pp. 276-277 of the Sound Mind Investing Handbook):
1. Call Schwab. Tell the account rep you have money at Vanguard and want to move it. Ask for the forms you need to authorize Schwab to handle the transfer. (If you prefer, go to Schwab's website and download the forms.)
2. Liquidate your holdings. Either by phone or online, sell your Vanguard holdings and keep the proceeds in cash (or a Vanguard money market fund). It is this cash you will authorize Schwab to transfer to your new account.
(Digression: During the transfer period, which can run two-to-four weeks, your assets won't be invested in the equity markets. Depending on market performance during this period, your absence can be good, bad, or immaterial. This out-of-the-market period can be avoided by transferring your Vanguard fund shares directly to Schwab. When the transfer is complete, you can continue to hold your Vanguard shares, or sell them and buy something else.
Even though the direct transfer approach is an option, we think the easiest, cleanest — and usually, cheapest — way to make the switch is to liquidate your Vanguard holdings, transfer the cash, then start fresh by making purchases in your new Schwab account, as described below. Note: Vanguard won't charge you to sell the funds while they are still in your Vanguard account, but Schwab will if you wait to sell them after they've been transferred.)
3. Design your new Upgrading portfolio by following the "Easy as 1-2-3" steps  . These instructions walk you through how to allocate your portfolio among the various asset classes and also explain which fund(s) to buy in each class. The end result will be a broadly diversified portfolio tailored to your age and risk tolerance.
4. Invest according to your plan. When the proceeds from your Vanguard liquidation reach your new Schwab account, call Schwab (or use their website) and instruct them to buy the various Upgrading funds you selected in step 3.
5. Keep on investing according to your plan. Eventually, some of your Upgrading funds will falter in performance. You'll receive a new issue of SMI and see the news: one of your funds is being removed from the recommended list and another is taking its place. That means it's time to sell the old fund and buy a new one from the recommended list. Don't hesitate. Don't delay. More often than not, you'll be better off if you ignore any applicable redemption fees, transaction fees, or tax consequences. As Nike says, "Just do it!"
STAND BY YOUR PLAN
Of course, Step 5 above applies to investors across the board, not just those moving up from Level 3. And, frankly, many investors find sticking with their plan to be much tougher than setting up their plan in the first pace. They get distracted by news headlines and market behavior.
Perhaps they read that small-company stocks are likely to be hurt the most if the economy slows again, so they begin to second-guess their plan to invest in a small-cap fund. Or they see an interview with a money manager who thinks it won't pay to invest outside the U.S. in the first half of the year, so they begin wondering whether they should sell their international holdings.
To become a successful long-term investor, you must learn to make decisions of reason based on your plan, not decisions of emotion based on the news of the day. Don't be sidetracked by fear. There will always be the possibility of loss. There will always be reasons to wait.
At critical decision points, the best thing to do is to get out your plan and read it again. Then, do what it calls for — i.e., what you planned to do. Proceed with your plan despite your fears. Your plan, if it's a good one, will minimize your risk of loss through adequate diversification and a long-term time horizon.
Of course, we're not suggesting that your plan be entirely inflexible. Flexibility, within certain parameters, is appropriate at times. (For example, largely in response to the events of the past two years, we've just added optional inflation hedges for Level 4 investors.) What we are suggesting is that flexibility should be dispassionate. Any change in strategy should be made because of carefully considered reasons and with a clear eye to the long-term implications (both pro and con) that such a change may have.
Having your original plan written out, along with your notes as to why you created your plan as you did, can be a great help as you think through whether specific alterations are appropriate. Keep your plan handy and refer to it when a decision is required.
Like Cindy the shopper, if you'll stick with your plan, you're much more likely to end up with the "ingredients" needed to enjoy a recipe for investing success. 
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Austin Pryor is the founder and publisher of the Sound Mind Investing newsletter and website. His desire is to help people understand and apply Biblically-based principles for making spending and investing decisions, ultimately helping them have more so they can give more. |
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Former SMI staffer Joseph Slife is now the senior producer and co-host of The World & Everything in It, a weekly radio program produced by WORLD magazine that can be heard here. He spent 15 years with Crown Financial Ministries, co-writing articles with Larry Burkett and serving as executive producer for broadcasting. |
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