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If you had hoped that the Facebook IPO would be your winning lottery ticket to retirement success, sorry -- it doesn't look like anybody who bought shares for the first time last Friday is going to get rich quick.
With the stock market having posted an extremely orderly yet still precipitous decline so far this month, though, you may get a much-longer-term opportunity to build wealth. It won't be quick, and it's anything but a sure thing -- but having an investing plan that will let you take advantage of opportunities like this is essential if you want to reach your goals.
Why you need a plan
You might think that coming up with an investing plan is like counting calories or budgeting your expenses: a big hassle that doesn't necessarily translate into results and is often more trouble than it's worth.
But when you look closely at some of the best investors of all time, you'll quickly realize that they all have well-planned strategies behind them. They aren't all the same strategies; in fact, many of them are diametrically opposed to each other, leading to some interesting showdowns when they take each other's investment theses on.
With all these choices, how can you come up with a strategy that will work for you? There's no one-size-fits-all answer to that question either, but here are some thoughts to consider.
1. Understand risk.
Investors have a hard time dealing with risk. Many like to see it in black-and-white terms -- bank accounts are safe, and stocks are risky. But to have a successful plan, you have to realize that there are many kinds of risk, and a portfolio approach can make a combination of assets less risky on the whole.
For instance, bank accounts are insured and have no risk of losing principal -- yet their puny rates make them useless in fighting inflation right now. Treasuries may have government backing, but funds that invest in them can lose value when interest rates rise. Conversely, you can tailor a portfolio combining stocks, commodities, and other assets considered risky to be less volatile than any of its components alone -- and that makes it more likely you'll overcome other financial risks. You can't afford to let fear of risk stop you from investing as well as you can.
2. Be patient but bold.
Once you start thinking of a strategy, you may get the sense that you have to implement it right away. But implementing a plan doesn't mean buying everything right away.
Value investors understand well that no matter how attractively priced a stock may be, it can always go lower. Both Netflix (Nasdaq: NFLX ) and Green Mountain Coffee Roasters (Nasdaq: GMCR ) have rewarded patience so far, as Netflix stock is still paying the price for its customer dissatisfaction following its split of streaming and DVD delivery services, while Green Mountain's long-anticipated sales slowdown still blindsided corporate executives when it came.
Having a plan, though, lets you draw your line in the sand and be bold when the moment is right. Sometimes you'll pay more than you may have had to for a stock that way, and other times, you'll miss out on what turns out to be a blockbuster. Warren Buffett said that one of the biggest mistakes he made that hurt Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) investors was to stop buying Wal-Mart (NYSE: WMT ) early in its big-growth phase as its stock got more expensive. Still, there are enough good opportunities out there that maintaining your discipline should give you plenty of chances to profit on your terms.
Build your perfect plan
The right plan focuses on the long run and your needs years down the road. You should leave investments of all kinds -- from stocks to real estate, bonds to commodities -- on the table. Your perfect plan may not have you buy all those now and may never include some of them. But the right plan combines the best traits of all of them into a single portfolio.
It's always scary to invest when the market is doing its best impression of a roller coaster. Having a plan can make that ride a lot more comfortable, though -- and better yet, it can give you an unemotional set of guidelines you can follow no matter what the future brings for the markets.
Once you have a plan in place, finding smart investments to fill in the blanks can be a lot of fun. The Motley Fool's special report on retirement includes three time-tested names that have the capacity to go much further. I invite you to click here and start reading your free copy right now.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.