4 Easy Steps to a Strong Investing Plan

When it comes to investing, too many people fall into the trap of just buying a few stocks here and a fund or two there, eventually adding up to an extensive but seemingly random investment portfolio. Without any coherent unifying theme to your investing, though, you'll constantly struggle to figure out whether you're on track to reach your goals or falling behind.

By contrast, having a strong investing plan puts all of your investments into a broader context and lets you judge your success much more easily. But how do you create such a plan? Let me suggest a four-step plan toward putting together an investing plan you can use to achieve all your goals.

Step 1: Know your goals.
The hardest part of planning is knowing where you're headed. Especially with long-term goals like retirement, it's hard to predict where you'll be or what you'll need decades down the road.

But without at least some goals, it's almost impossible to figure out if you're moving in the right direction. Put your goals in writing with as many details as you can, understanding that you'll refine and replace them over time.

Step 2: Know your temperament.
If you want to be comfortable with your investing, you need to invest in a way that feels natural to you. There's no single perfect way to succeed at investing; different investors have used very different strategies, focusing on everything from value stocks to high-growth stocks, dividend stocks to high-yield bonds, and commodities to real-estate investment trusts. Some investors are comfortable taking concentrated positions in just a few strong-conviction stocks, while others prefer the diversification of broad-based mutual funds or ETFs.

You can succeed with any of these strategies, or a combination of several of them. But if you try to invest in a way that doesn't fit with your temperament, you may well sabotage your long-term results. If you're a conservative investor, for instance, the wild swings that high-growth leaders make will tempt you to make the mistake of selling low after buying high. If you prefer volatile investments, then the slow but (usually) steady long-term success of IBM (NYSE: IBM  ) , 3M (NYSE: MMM  ) , and Caterpillar (NYSE: CAT  ) may be too boring. Even though 3M has continued its tradition of innovation, Caterpillar has greatly expanded its business both geographically and by adding product lines, and IBM has transformed itself from a hardware pioneer to an IT services giant, they won't give you the same thrill as an up-and-coming growth stock. Be yourself and use strategies that complement your personality, and you'll improve your chances to succeed.

Step 3: Make contingency plans.
Your investing plan needs to be able to adapt to changing conditions. You need to strike the right balance, because too rigid a plan will break apart during times of stress, whereas too loose a plan won't give you enough guidance to do you any good.

For instance, in the early and mid-2000s, many dividend investors turned to Bank of America (NYSE: BAC  ) , US Bancorp (NYSE: USB  ) , and other strong-yielding bank stocks as ways to generate what appeared to be safe, dependable income. Traditionally, financial stocks ranked high among dividend payers and were seen as being in the same class as utilities in terms of safety and income. When the financial crisis arose, though, many bank dividends ended up on the cutting-room floor, and dividend investors were left with the double-hit of less income and big share-price losses.

If your plan wasn't flexible enough to let you consider alternatives until the worst of the crisis had hit, it was too late to do anything to protect yourself. But the writing was on the wall for banks for some time, and an investing plan that allowed you to replace one class of dividend stocks with others could have avoided the worst of the damage from the financial crisis.

Step 4: Grade yourself.
Finally, just because you've got a plan doesn't mean you're done. You also have to make sure it keeps working for you over the year.

If you see that something isn't working as well for you as it used to, take a critical but unemotional look at what's happening. Don't let temporary market blips force you to change your entire strategy, but if problems persist for a long time, don't just coast -- improve your plan.

Get with the program
When the markets are strong, a plan may seem unnecessary. But over the long haul, a plan can really help you stay on track when tough markets tempt you to go off course. All in all, the right plan can really improve your overall returns.

Once you have a plan in place, you'll want to find investments that fit with your plan. We've got some great ideas for you to take a look at, and you can find them in the Motley Fool's special report on stocks that will help you retire rich. Get your free copy today while it lasts!

Also, has Bank of America recovered enough to make it a good investment again? Find out by reading our premium investment report on Bank of America today.

Tune in next Monday for Dan's next column on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.

Fool contributor Dan Caplinger counts steps when he climbs stairs. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position on 3M, as well as creating a synthetic long position on IBM. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy gives you a step-by-step guide to what we do.


Read/Post Comments (8) | Recommend This Article (50)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 06, 2012, at 7:30 PM, topbeancounter wrote:

    What a bunch of nonsense. Just use common sense and do it yourself. These great investment counselors are a bunch of order takers. Those "experts" that appear on FOX (remember, it's fair and balanced because they say so) or CNBC (where do they find these folks?) are a joke. And people actually listen to them????

    Someone spits in Greece and the market drops 200 points. Someone else cleans it up and the market goes up 200. Believe any of it? I don't.

    The market is largely a floating crap game and you don't have the rules. So pay attention to what you're doing. My girlfriend, college educated but not very bright financially, once bought a $,40 per share stock since someone had told her it was a "strong buy". It went under three weeks later.

    Cramer, the genius, once stated that a $40 stock was absolutely secure and it went under less than two weeks later.

    Do your own research. Assume that the stock will go down as soon as you purchase it, because it generally does. Expect nothing if you buy shares in companies that don't pay dividends, because that's what you're going to end up with anyway...nothing, so you won't be upset when you receive nothing.

    Then go to Vegas and put it all on red. You almost have a 50:50 chance of winning, or way better odds than you do on Wall Street.

  • Report this Comment On August 06, 2012, at 8:12 PM, Rarusnans wrote:

    Completely agree with Topbean...and this article is a real waste of time. )(

  • Report this Comment On August 07, 2012, at 4:34 AM, FoxHat wrote:

    "My girlfriend, college educated but not very bright financially, once bought a $,40 per share stock since someone had told her it was a "strong buy". It went under three weeks later.

    Cramer, the genius, once stated that a $40 stock was absolutely secure and it went under less than two weeks later."

    WHAT DOES THIS TELL YOU?

    It , with many other things, tells me that it is all falling apart...

    private food stores..."strong buy"

  • Report this Comment On August 07, 2012, at 10:31 AM, Alex172 wrote:

    Looking at the economy and where it is headed is the way to invest. For instance, Natural gas is just starting to gain steam for the trucking industry and fueling stations are being built, export LNG tanks are being constructed at port cities for transport overseas, the US is attempting to solve our green energy problems, Honda is producing natural gas vehicles, etc Why not research and invest in solid companies that are pursuing some of the up and coming new technologies in their toddler stages? Look at what happened when cell phones came into being?

  • Report this Comment On August 07, 2012, at 9:22 PM, canadacomments wrote:

    Well Dan, I and quite a bunch of other people think your article presents a fine start/restart for investing. Topbeancounter sounds like he is a bit manic-depressive. Some reasonable thoughts on the talking heads, but Las Vegas is hardly like the stock market if you learn to properly evaluate stocks. The ostrich maneuver recommended by FoxHat only guarantees that you will have a lot of old, moldy food in 18 months time. Alex172 presents one good idea of many out there.

    Long WPRT

  • Report this Comment On August 08, 2012, at 1:03 AM, pedigreebull wrote:

    Stay in touch with current developments, use balanced approach and a douse of common sense!

  • Report this Comment On August 09, 2012, at 4:43 PM, Darwood11 wrote:

    Excellent article.

    For the critics, it's useful to remember that the average net worth of people aged 55-64 is about $180,000. For those over 65 it's $232,000.

    If we all saved the 15% we should each and every year for retirement from the age of 25 onward, then this article would be unnecessary. But we don't. Or, if we do, apparently many of us don't invest it properly. Either way, there's a burning need for good information.

    How can I say that? Investing a paltry $2000 a year from the age of 25 to 65 at 5% yields a net worth of $239,000 at 65. Crude numbers, I admit. Another leg of the chair is to live within one's means, or have a plan to achieve a debt free existence by retirement age. Not exactly rocket science.

    If anyone is interested in seeing where they stack up, for chuckles, go to

    www.stackmeup.com

    I have nothing to say about the relevance or accuracy of the above website, but it's interesting to compare net worth for one's age group.

  • Report this Comment On August 20, 2012, at 5:09 AM, thidmark wrote:

    If you invest at least semi-intelligently, you'll get a positive return. It may not beat the market but you'll have something to show for your efforts.

    If you're an idiot or just plain lazy, yeah, you're probably better off gambling in Vegas.

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