7 Investing Principles to Help You to do the Right Thing
- Friday, November 04, 2011
When the stock market experiences sharp downturns, as it did in early August, we often hear from readers asking "What should I do now?" Our answer is always the same: "Ignore the market and follow your long-term plan."
It's at this point many readers discover (1) they really don't have an objective long-term plan to guide them, or (2) they are following SMI's suggestions, but are fearful. If you haven't yet adopted a specific strategy to guide your decision-making, it's time to give this serious thought. The SMI New Reader Guide has the basics you need to get started, with more information available in The Sound Mind Investing Handbook.
If it's a question of emotional stress, perhaps the following will be of some encouragement. The examples are directed primarily to those applying SMI's monthly Upgrading strategy, but the principles apply to everyone.
PUTTING AWAY CHILDISH THINGS
Too often, we make decisions of emotion rather than decisions of reason.
We are focused on short-term satisfaction rather than on long-term objectives. Against all reasonable expectations, we somehow expect to astutely select the cream of the investment crop, ride our holdings to the crest of a glorious bull market, and then wisely take our profits. We'll move to the sidelines and let other (presumably less savvy) investors suffer the frustrations of the inevitable correction that follows.
When we think like this, we're living in a fantasy world. When our fantasies don't come true, we often react with bitter disappointment, anger, or fear.
Naturally, every successful investing strategy requires some degree of self-discipline. But SMI offers strategies that minimize the wear and tear on your emotions and where consistently doing the right thing comes more easily.
Look at it this way: self-discipline is the ability to do the right thing at the right time every time. By the "right" thing, we don't mean always making the most profitable decision. That's impossible. The right thing is to ignore the distractions of news events and well-intentioned advice and stay with your plan. In other words, to make decisions of reason rather than decisions of emotion. Consider the ways that SMI's approach helps you exercise self-discipline.
• Doing the right thing is easier when the strategy is simple. Our portfolios use relatively few ingredients, and we use plain-English explanations to tell you what to do and why we're doing it. The simplicity lets you see how everything fits together so you can feel more comfortable making decisions.
• Doing the right thing is easier when the rules are clear cut. SMI offers specific guidelines that determine your mix of stocks and bonds and fund selections. You can have more confidence when you know you're making buy/sell decisions that fit into a coherent plan.
• Doing the right thing is easier when you don't have to respond too quickly. We don't offer a telephone "hotline" or email alerts because the SMI approach doesn't require continual tinkering as prices fluctuate. There's no need to respond immediately to news events.
• Doing the right thing is easier when it's not time consuming. You don't need to read the Wall Street Journal or keep daily records or charts. Upgraders simply need to turn to the "Recommended Funds Report" each month and perhaps place an online trade or two. Just-the-Basics investors need to tend to their portfolios only once a year.
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