Don't have an investment plan? Start here » PRINT

By Paul Merriman
August, 2006

Some people think a really good investment plan is complex and difficult; they may put it off thinking it's no good unless it's perfect. But an imperfect plan is better than none at all. In this article, Paul Merriman outlines 10 steps that will help you get off on the right foot.

Successful investing starts with a good plan, one that you can understand and that you will use. Many of our articles are devoted to investment strategies and plans, and I know some people find the topic a bit overwhelming. Some people put off having any plan until they have what they think is the perfect plan. So I am pleased to pass on the following basic principles for successful mutual fund investing.

1. Have a plan. Even if it's simple, even if it's imperfect, having a plan is much better than simply following your whims and emotions. Put your plan in writing and keep it handy.

2. Start investing as soon as possible. We have said it repeatedly: Time is your best ally. Give your plan time to perform and you'll get the benefit of compound interest. This is especially effective in tax-deferred accounts.

3. Diversify your investments. Your job and your home are both dependent on your local economy. If you invest in your company's stock as well, you may be putting too many proverbial eggs in one proverbial basket. Diversify asset classes (stocks, bonds, cash) and diversify geographically by having some of your money invested internationally.

4. Invest regularly. Investing is a process, not a onetime event. If you make investing a habit and routinely "pay yourself first" from your income, you'll maximize your chance for success. Best: Set up an automatic savings plan at work so you don't even see the money before it is invested for you.

5. Maintain a long-term perspective. Microsoft Chairman Bill Gates, now the richest man alive, once said he only looked at the price of Microsoft stock about once a month. Gates knows a secret that too many investors ignore: Focus on long-term results, not what's immediately in front of you.

6. Keep some of your money in equities. Almost any portfolio can benefit from at least a small investment in equities for growth. Over the long-term, stocks and the mutual funds that invest in them outperform bonds and cash and keep investors ahead of inflation.

7. Keep some of your money in cash. It's certainly wise to have enough cash on hand, or funds with low volatility, to cover emergencies, contingencies and opportunities. Don't set yourself up so that you have to sell an investment at the wrong time in order to meet immediate needs that you know are bound to come up sooner or later.

8. Know what you are buying. Don't part with your money until you understand the potential risks that go along with the potential rewards from any investment. Keep asking questions until you understand. And don't invest in things that are too complex for your own comfort level.

9. Understand your plan so that somebody with designs on your money or your business can't unreasonably talk you out of it. Most people in the investment business want you to abandon or modify your plans for their own purposes. I am not saying you should never listen to them. But you should be able to measure their arguments against your own careful planning and thinking. Otherwise, they may persuade you to abandon your plans on the basis of emotions or irrelevant factors. That will put some of your money in their pockets. But it may not put any more money in your pocket, and it may in fact cause you serious financial harm.

10. Once you have a plan follow it. It's a funny thing about plans: They don't work unless you follow them. Even a "perfect" investment strategy does you no good if you can't or won't put it into practice. If you can't bring yourself to do this, modify your plan until it's one that you will follow. Even an imperfect plan, if you use it, is better than none at all.

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