No matter whether the market's melting down or experiencing one of the most explosive rallies it's ever seen, successful investors stick to their overall investing plans. If you don't have an investing plan in place, the up-and-down market may be making you feel a little seasick -- and unsure about what you should do next.
Luckily, it's never too late to come up with a plan for your investing. And in fact, if you want to be the best investor you can, you really need to know how your investments all tie together. Without a plan, it's difficult to apply all the other useful advice you'll hear about becoming a better investor.
Getting lazy during easy times
Since March, the stock market has risen so quickly that it's been hard for long-term investors to keep up. More generally, though, during long, sustained bull markets that last for years, you'll often end up buying a hodge-podge of different stocks that don't share any sort of common theme. When you don't have a well-defined investing plan, it's easy to fall prey to whatever stocks happen to be hot at a given moment.
For example, think back a few years and ask yourself this question: Had you ever heard of stocks like Titanium Metals (NYSE:TIE) and Southern Copper (NYSE:PCU) before their shares took off? Those who got in early experienced some stellar gains. You even could have missed the first few years of gains and still had plenty to celebrate, as those stocks kept on rising despite their past success.
The problem, though, is that many investors discovered these stocks and others like them only after they had seen most of their gains. Since they didn't have any plan for what to do with them, they simply held onto their shares -- and saw them lose a huge amount of value during the bear market. And although they've since recovered some of those losses, you might well have sold them at their lows if you didn't know why you were holding them in the first place.
Don't make the same mistake twice
That's one reason why it's so important to have a roadmap to your investments. Without one, it's easy to get lost -- and even if you're fortunate enough to pick winning investments, you won't know how to protect your profits.
But how do you go about putting together an investing plan that will help you become a better investor? The best plans share the following traits:
- They're not too complicated. You don't have to spend hours each day doing in-depth research or find the next Apple (NASDAQ:AAPL) in order to find a plan that will work. In fact, complicated plans often backfire on you. To put together a plan you can actually follow, keeping things simple is the best move.
- They change with you. There's no way you can anticipate everything that may happen in the future. The stock market may not cooperate with your plans. Your personal situation could change drastically, making your initial estimates completely useless. A great plan gives you ways to handle unexpected emergencies and major life changes.
- They won't scare you to death. The right plan takes into account your own investing preferences. So whether you need current income from conservative dividend stocks like Procter & Gamble (NYSE:PG) and PepsiCo (NYSE:PEP) or want to shoot for the moon with growth stocks such as Amazon.com (NASDAQ:AMZN) or Hansen Natural (NASDAQ:HANS), your plan should make you comfortable with your portfolio.
To give you a sense of what you're looking for in a plan, here's a simple example. Strive to increase your savings as much as you can. Build up an emergency fund in a savings account or short-term CD to cover immediate expenses if you run into financial trouble. Then start investing in a variety of promising stocks and stock mutual funds that you'll select to match your desired return and level of risk.
Once you have the basic framework figured out, you'll still need to fill in the blanks with the right investments. But with a plan in place, your investing will suddenly have an underlying purpose -- and you'll find it easier to fit your stocks and other investments into their proper places as part of a smart long-term investing strategy.
