Getting Started (Part 1): Have a Plan

January 22, 2013

Many investors use the New Year as a time to get their investments in order. To help, we’re launching a series of posts to help investors get invested. We’ll look at allocating your portfolio to stocks and bonds, and how get back in the market. But the very first step is to have a plan.

A common trait among successful long-term investors is having a plan that helps them stay focused in up and down markets.  So if you are getting invested again or investing for the first time, you’ll want to make sure you have a road map to guide you through what’s to come.  If you already have an investment plan, reconfirm it.  If you don’t have a plan, set one.

Here are some questions to consider:

  • Why are you investing? What are your goals? Are you investing for retirement or for a child’s education?
  • How much will you ultimately need for each goal?
  • How long do you plan to be invested? If you’re investing for retirement, for example, do you plan to retire in 10 years or in 30 years? If you are saving for a child’s education, do you have 5 years or 15 years?
  • How much money will you need to set aside?  The answer will depend on certain assumptions about long-term returns on different asset classes (stocks vs. bonds).
  • How often will you invest – Every month? Every paycheck?
  • How often will you re-balance your portfolio?
  • Consider what tools you’ll use to achieve your goals: will you invest in individual stocks and bonds, or mutual and exchange traded funds (ETFs)?
  • If you are using funds and ETFs, how will you choose what funds to buy and sell? Will you use NoLoad FundX or a financial advisor?
  • Do you have a broker you’ll use to place your trades?  Or will you invest directly with a mutual fund company?

By answering these questions, you’ll have a framework that you can rely on in challenging market conditions. As a recent Wall Street Journal piece on New Year’s resolutions pointed out, “people who prepare plans on how to reach their goals, which psychologists call ‘implementation intentions,’ are more effective at reaching goals, by spelling out in their minds what they will do if an obstacle arises.”  For example, if you get tempted to sell stocks during a routine market correction, you can reflect on your plan and remember that stocks are a long-term investment and that you still have 15 years until you need the money you’ve invested. If you are using NoLoad FundX, your monthly tasks are spelled out for you to manage your portfolio – which funds to sell and which to buy.  By turning to the monthly newsletter you can quickly see how your investments are holding up compared to other funds with similar risk.

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