The Right Plan for Right Now

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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.

Fool contributor Dan Caplinger does his best to get a grip on his planning. He owns shares of Berkshire Hathaway. The Motley Fool owns shares of Netflix and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway, Netflix, and Green Mountain Coffee Roasters, as well as creating a diagonal call position in Wal-Mart and a lurking gator position in Green Mountain. 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 is always right.

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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 May 21, 2012, at 8:55 PM, MHedgeFundTrader wrote:

    This had to be one of the greatest change of life weekends in human history, endured by one Mark Zuckerberg. On Friday, he earned $9.2 billion with the flawed Facebook (FB) flotation. On Saturday, he married a Chinese doctor and longtime girlfriend, Pricilla Chan. Then on Monday, oops honey, I lost $1.2 billion. Talk about a rocky start! Never mind that the precise timing was intended to undercut any future divorce claims, hence no prenuptial. Her cost basis is $38 a share, his is zero.

    I knew that when the stock closed pennies above the $38 syndicate bid on Friday that there would be a Monday MORNING massacre. I warned away people from this issue at every opportunity. When Wall Street starts drinking its own Kool-Aid you, can count on a mass murder to follow.

    Brokers we urging clients to apply for 100 times the shares they really wanted in the expectation that that would get only 1% of their request. That paved the way for the ugliest broker confirm of the year, that you received the entire allocation that of Facebook shares that you applied for, and they were now down 13%.

    By Monday, some hapless investors still had not received notice of the allocation. At least they are faring better than the suckers lured into the aftermarket to buy stock at $43, now down 30%. Think of the entire flotation as a full employment act for the legal profession.

    There was enough mud on lead underwriter, Morgan Stanley’s face to fill Yankee Stadium. It is sad to see how low the standards and competence have fallen at this once great firm. I am now seriously thinking of taking this sullied name off of my resume, even though it is an ancient entry. Don’t worry, they’ll get their just punishment. The losses on their Facebook Stabilization fund is thought to be as high as $100 million, wiping out any underwriting fees earned. Expect investors to defriend (MS) post haste. What was expected to be the biggest payday of the year for Wall Street turned out to become the largest bill due.

    I made a killing on Facebook, not through any direct participation, but from the market timing it clarified. When the (FB) was down $5, the Dow should have been off 300. They fact that it wasn’t flashed a huge “BUY” signal to me, enough to cause me to rush to cover all of my profitable shorts and flip my model trading portfolio from a big “RISK OFF” stance to a moderate “RISK ON”. So far, it’s working, with Apple (AAPL) up $25 since my call, and (IWM) rocketing two full points.

    The Mad Hedge Fund Trader

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