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To many people, investing is a bit like playing the lottery. If you're lucky and you pick the right stock at the right time, you'll hit it rich. Otherwise, you'll probably just be out of luck. And at least in their eyes, many more people end up on the out-of-luck side of the equation than the hit-it-rich side.
Fortunately, the truth is a lot more optimistic. By making an organized effort to put together a road map of how you're going to invest your money and set up the rest of your finances, you'll be a lot closer to achieving all of your financial goals.
An owner's manual for your portfolio
In this month's brand-new issue of the Fool's Rule Your Retirement newsletter, which hits the digital newsstands this afternoon at 4 pm ET, Foolish retirement expert Robert Brokamp presents the concept of an investment policy statement, or IPS. Put simply, by putting together all the important facets of your financial life into an IPS, you're committing to live by a set of rules governing your money. Since you're in charge of setting those rules, you can make them whatever you want -- but the key is agreeing to follow them.
On the surface, the idea of putting together an IPS may seem like a waste of time. But having a written IPS does more than just fill up a piece of paper. You can refer to it again and again, especially during crisis situations, when panic and emotion threaten to make you take actions that you'll later regret.
Rules to live by
Perhaps the most important element of your IPS is the first one Robert talks about: what you believe about investing and why. Your strategy should take maximum advantage of your unique knowledge and philosophy, rather than going against the grain of your beliefs.
If you're a stock investor, you've probably noticed that intriguing investments come in all flavors. As an example, in the biotech industry, you'll find many companies with promising treatments. Dendreon's (Nasdaq: DNDN ) Provenge offers a potentially revolutionary change in the way we fight cancer. InterMune (Nasdaq: ITMN ) hopes to fight a type of lung disease with its drug pirfenidone. Gilead Sciences (Nasdaq: GILD ) has a pipeline of drugs designed to fight hepatitis and HIV, among other diseases.
Yet despite their potential, these stocks also bring immense volatility. When times are good, they can soar, as Dendreon saw when the FDA approved Provenge for use against prostate cancer. But when things go wrong, they can go really wrong. InterMune fell 75% yesterday when the FDA declined to approve pirfenidone. Gilead recently released disappointing earnings, and it believes that the future may be even gloomier, blaming health-care reform and other headwinds.
In contrast, some companies aren't nearly as exciting. Procter & Gamble (NYSE: PG ) makes billions providing everyday household items like toothpaste and detergent -- and it's seeing its fastest volume growth in nearly five years. ExxonMobil (NYSE: XOM ) turned delivering gasoline to millions of customers into record profits during the oil boom in 2008. After the bust, its earnings are back up, along with the price of crude. Costco (Nasdaq: COST ) has ugly warehouse-looking stores that depend on high volume to make up for slim margins, yet the company has managed a steady, modest 6% annual earnings growth rate over the past five years. It's unlikely that any of these stocks will give you huge growth -- but you also won't see many 75% swings owning them.
For some investors, a chance for huge gains is worth taking big risks, and they'd see safer stocks as boring. For others, the roller-coaster ride of volatile stocks would be too much to handle. They're much more comfortable with more stability -- even if it costs them some potential return.
Get a plan
Neither set of investors here is wrong or right. There's no one perfect way to invest, but there is a perfect way for you to invest. But until you really think about it -- and understand yourself well enough to be able to express your particular style in a written IPS -- you won't make the most of your investing.
To learn more about putting together an IPS -- along with the other key issues it should address -- you'll want to take a closer look at Robert's article in this month's Rule Your Retirement. A free, no-obligation trial subscription gives you complete access not just to this month's brand new issue but also a host of other resources that will help you improve your retirement.
You don't need to win the lottery to have a secure retirement. All it takes is a plan -- and with a little help, you can put together the plan that will work best for you.
To set up an IPS, a trustworthy financial planner may be just what you need. The Garrett Planning Network is offering a limited-time 10% discount for new Motley Fool clients. Just click this link, search your state, and look for The Motley Fool icon to identify participating advisors.