7 Investing Principles to Help You to do the Right Thing
- Austin Pryor
- 2011 11 Nov
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.
• Doing the right thing is easier when you know that your losses won't kill you. No strategy is perfect, so you know ahead of time you will have some losses. But when you're well diversified, they likely won't be devastating. As we point out regularly, leadership constantly rotates among the stock risk categories. Being well diversified ensures that inevitable periods of weakness in one part of the market won't torpedo your whole portfolio.
• Doing the right thing is easier when you make commitments a little at a time. Most months, we suggest only one or two fund changes for Upgraders. Depending on what you own, you may not even be affected in any given month. If you are, the changes represent just a portion of your holdings. That's much easier than changing your whole portfolio. The stakes aren't so high that your fear of making a mistake paralyzes you.
• Doing the right thing is easier when you know you're in for the long haul. In 2008, both of our model portfolios trailed the market for the first time in 10 years. In 2000 and 2002, Upgrading beat the market but ended up losing money. We're realistic and understand these things are going to happen from time to time. Investing often involves taking two steps forward and one step back. But that needn't alarm us because we've got time on our side.
We can look forward to maturing in our faith (and our investing decisions) beyond childish things because "His divine power has given us everything we need for life and godliness…For this very reason, make every effort to add to your faith…self-control..." (2 Peter 1:3,5,6).
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