6 Principles for a Solid Investing Plan With Mark Biller

Show Notes

Proverbs 21:5 tells us, “Steady plodding brings prosperity; hasty speculation brings poverty.” That’s one of the most quoted verses about investing, and with good reason. It lays the foundation for a successful investing plan. Today, Mark Biller joins us with 6 principles to help you steadily plod your way to a sound investment plan.

• 6 PRINCIPLES FOR INVESTING IN TURBULENT TIMES
• The SMI newsletter has an article with 6 principles to help us keep a level head in turbulent times.
• The article begins with the idea that investing is like riding a roller coaster while wearing a blindfold. You can’t tell when a steady incline will give way to a precipitous decline.
• Unfortunately, there’s no way to make market volatility completely disappear — it’s an unavoidable part of investing for most people. But you can stay steady through the ups and downs by using a well-defined and disciplined investing strategy.
• Of course, there’s no single strategy that is right for everyone. But every good long-term strategy incorporates six core principles.
• 1. DIVERSIFICATION: The first principle is that success doesn’t come from hoping for the best, but from knowing how you’ll handle the worst. What we mean by that is that since market downturns are an inevitable part of investing, your plan should account for that.
• The best way to do that is through diversification, which means purposely selecting a range of investments that “march to different drummers.”
• Holding different types of investments that tend to respond differently to economic events helps to smooth out the overall volatility of your portfolio. The hope is that if some of your investments “zig,” others will “zag.” Much of the modern investment business is built on research that shows there are ways to combine various types of assets in ways that reduce risk without sacrificing much in the way of returns.
• 2. CLEAR RULES: It’s that your investment plan needs to have clear-cut, easy-to-understand rules. The more specific and actionable they are, the better you’ll be able to make investment decisions quickly and with confidence.
• For example, instead of a plan that calls for “significant investment in small-company stocks,” try to define that more clearly. Perhaps instead the plan says, “30% of my portfolio will be invested in small-company stocks.” That’s straightforward and measurable, whereas the other is too open to interpretation.
• Also, your strategy should not only tell you what to invest in, but it should also offer precise guidance in telling you how much to invest and when to buy and sell. But even someone just plugging away in their 401k can do this by defining how much and how often they’re making their contributions.
• 3. PLAN SHOULD REFLECT LIMITATIONS: Principle number three is that your investment plan must reflect your financial limitations. Never ignore the words “higher risk.” Every day, people who thought “it’ll never happen to me” find just how wrong they were.
• Investing isn’t a game where gains and losses are the means of keeping score. Money isn’t an abstract commodity. For most of us, it represents years of work, hopes, and dreams. An unexpected financial loss can be devastating. So a good investment plan should discourage you from taking risks you can’t afford.
• Your top financial priorities ought to be getting debt-free and building an emergency savings reserve. That’s building the appropriate foundation that makes you financially strong enough to bear the risk of loss from investing.
• Possible exceptions might include contributing to a workplace retirement account, especially if your employer matches your contributions (essentially “free money”).
• 4. STAY WITHIN YOUR COMFORT ZONE: Your investment plan needs to keep you within your emotional “comfort zone.” Don’t adopt a strategy that robs you of your peace and takes you past your “good night’s sleep” level! If you do, you’ll likely bail out at the worst possible time.
• The amount of risk you take should be consistent with your “investing temperament” and your season of life. That’s why some sort of risk assessment is usually part of the startup process when you’re working with a financial avisor.
• 5. PLAN MUST BE REALISTIC ON EXPECTED RETURNS: The fifth principle for a solid investment plan is it needs to be realistic concerning the level of return to expect.
• Over the years, we’ve occasionally had people ask us to recommend safe investments that will guarantee annual returns of 10%-12% or more.
• If by “safe” they mean there’s no chance of the value of the investment falling, we don’t know of any investments like that. Investments that are “safe” in that sense typically pay much less than 10-12%.
• That said, the recent spike in inflation has created a rare exception: I-Bonds, which currently yield close to 10%.
• Return and risk are inextricably linked. Investment vehicles that offer a higher rate of return than “normal” do that because they have to in order to entice investors to accept a higher level of risk.
• 6. START SMALL AND ASAP: Your plan should encourage you to begin investing with small amounts, so you can get started as soon as possible and take full advantage of the power of compound interest.
• One example in the article describes two young people named Jack and Jill. Jack started depositing into an IRA when he was really young, kept it up for just 10 years, and deposited about thirteen thousand dollars total. Jill waited until she was older to start an IRA, but then deposited way more than Jack — $120,000 over 40 years. They both earned the same rate of return.
• Despite Jill depositing about 9 times more than Jack, his IRA ended up being slightly bigger at retirement. It’s kind of a fanciful example designed to make a point more than offer a blueprint.
• But the point is a powerful one, and it’s simply that Jack’s earlier start, even with smaller amounts and fewer deposits, turned on the power of compounding much sooner. And time plus compounding can be a remarkable formula.
• And that brings us back full circle to Proverbs 21:5 that you started the program with: “Steady plodding brings prosperity.”
• Remember, it’s never too late to start. Sure, the best time to start investing might have been 20 years ago, but the next best time to start investing is today!
• You can find more articles and investment advice at SoundMindInvesting.org.

• When does it make sense to surrender an annuity?
• What are good resources to access to learn more about wise financial management and investing?

• The Sound Mind Investing Handbook