Through turbulent times, the most successful investors have a plan to follow. But if you don't have a solid investing plan, is it too late to make one? Are you doomed to poor performance?
Throughout the market downturn, you've seen lots of advice. You know you shouldn't panic. If you're investing for the long term, don't dump all your stocks at the lows. The assumption we've made all along is that you initially chose your investments as part of an investing plan -- one you were happy with, at least until the bottom fell out of the entire stock market.
Needless to say, not everyone had a plan like that. But luckily, even if you're in a tough spot without a good plan, you can still put one together that will help you for the rest of your investing career.
The danger of rosy times
When times are good, it's easy to cobble together a group of stocks without any coherent investing plan at all. Too often, investors buy stocks they read about somewhere -- typically after their best days are behind them.
Consider, for instance: How many people had even heard of fertilizer stocks PotashCorp
They proceeded to go up even more -- a lot more. But plenty of investors found out about them only after most of the run-up was over. Lacking a plan, many held onto shares even as the commodities boom ended -- and saw their shares plummet. And even worse, if you panicked and sold at the lows, you've missed out on their recent recovery.
The drive to succeed
Experiences like these can give you the resolve not to make the same mistake twice. But as readers of our Rule Your Retirement newsletter understand, you're not alone. Last December, Foolish expert Robert Brokamp shared a number of stories about how subscribers took their first steps toward getting their retirement savings under control.
The reasons vary as widely as the people involved. For some, the pressure of what the future will bring motivates them to come up with a plan to deal with it. Others are thrust into action in response to some tragedy -- whether it's the current bear market or something more personal. Still others come with a genuine belief that investing will help them reach their goals -- but lack the tools to implement a good investing strategy.
It doesn't matter what gets you to go forward with a plan -- as long as you do it.
Make a plan
So, what's the perfect plan look like? Great investing plans have three things in common:
- They're flexible. Try as you may, you simply can't predict everything that will happen in your financial life. Just like a diet that doesn't let you eat a single snack is doomed to failure, a great financial plan accounts for the inevitable pitfalls -- with tools like emergency funds and other contingency plans.
They're simple. You don't have to read company annual reports every day or find the next Microsoft
(NASDAQ:MSFT)in order to have a successful plan. Quite the contrary -- great plans can start as easily as making regular contributions to an index fund, while letting you add other investments as your comfort level with investing increases.
They're panic-proof. No, I'm not saying you have to come up with a way never to lose any money. But what you do need is a strategy you can live with -- whether it involves conservative investments, like dividend payers Kimberly Clark
(NYSE:KMB)and Johnson & Johnson (NYSE:JNJ), which help you control your risk, or more aggressive stocks like Rio Tinto (NYSE:RTP)or Intuitive Surgical (NASDAQ:ISRG), which can magnify your potential returns.
So, here's one possible plan: Save as much as you can afford from your earnings. Keep enough money to cover your short-term needs in safe investments like cash and bank CDs. With the rest, invest for the long term in a variety of promising stocks or mutual funds that match up with your risk tolerance.
That may sound like a reasonable framework, but how do you fill in the blanks? While there's no good one-size-fits-all financial plan -- it has to be tailored to your own situation -- the folks at Rule Your Retirement have come up with a number of ways to flesh out your plan, along with practical steps to implement it.
Although it's a subscription-based service, you can get a free look at Rule Your Retirement right now, with no obligation. It's our way of showing that we believe making a plan is the most important thing you can do -- especially now.
Learn more about planning your investments:
Intuitive Surgical is a Motley Fool Rule Breakers recommendation. Microsoft is a Motley Fool Inside Value recommendation. Johnson & Johnson and Kimberly-Clark are Motley Fool Income Investor recommendations. Try any of our Foolish newsletter services free for 30 days.
This article was originally published Nov. 6, 2008. It has been updated by Dan Caplinger, who doesn't own shares of the companies mentioned in this article. The Fool's disclosure policy is as perfect as they come.