Preparing to Invest: Have a Plan

Before you deploy your investment dollars, have an investment plan. Get it down on paper along with your reasons so that when things get scary, you will stick to your plan. For asset allocators using index funds, this might look something like:

What	Why
Stock/bond split	Risk control
Asset allocation	Diversification, opportunities for capturing benefits during re-balancing
Re-balancing strategy	Systematic method of capturing diversification benefit (buying low, selling high), Risk control

Reasons to revisit your plan include changes in the following:

• marital status or family
• job
• tax laws
• life changes affecting your income/expenses
• life goals (eg. you no longer want to sail around the world--helping to raise the grand kids is what you really want)
• periodic adjustment for age/investment horizon (this is a risk adjustment done maybe every 5 years)
• financial system (should be pretty rare--these are not economic or political events)

Poor reasons to revise your plan are usually predictive and short term issues such as:

• hot tips forecasting the next growth opportunity
• trying to predict the effect of an economic or political event
• predictions of interest rates and monetary policy

If you have a reasonable plan, it's important to stick to it. Getting spooked during a downturn (are you investing within your risk comfort zone?) or jealous when others appear to be doing better than you (don't chase past performance!) will lead you down the road of buying high and selling low.