Making it Easy on Yourself to "Do the Right Thing"
When the stock market experiences significant weakness, we often get calls 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 that 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 definitely time to give this some serious thought.
If it's a question of emotional stress, perhaps the following will be of some encouragement. The examples are directed primarily to investors using SMI's model portfolios, 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 seem to 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, and 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 I wanted to offer one in our Sound Mind Investing newsletter that minimized the wear and tear on your emotions, where consistently doing the right thing would come easier for you.
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, I don't mean always making the most profitable decision. That's impossible. Rather, I mean 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 many 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 I 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. I don't offer a telephone "hotline" 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, keep daily charts, or do anything other than turn to our Recommended Funds page each month and perhaps make a phone call. Our indexing strategies only require annual attention.
• 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 won't be devastating.
• Doing the right thing is easier when you make commitments a little at a time. Most months, I suggest just a handful of fund changes. Depending on what you currently own, you may not even be affected. If you are, the changes represent just a portion of your holdings. That's much easier than picking up the phone and changing everything. 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. From 1999 through 2003, our Fund Upgrading strategy gained 67% while the broad stock market advanced just 2%. But those gains didn't come smoothly - in fact, two of those five years saw overall losses in the portfolio. We're realistic and understand that's 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) 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.
© Sound Mind Investing
Published since 1990, Sound Mind Investing is America's best-selling financial newsletter written from a biblical perspective. Visit the Sound Mind Investing website.
Originally published April 07, 2004.
