Plan According to Your Goals.
Invest According to Your Plan.

Plan first. Invest later. This principle, as expressed in the title to this article, has been basic to the SMI philosophy from the beginning. It's such a crucial concept that I covered it in the opening pages of my book:

In order to find peace of mind in your investment decisions, you need to become an initiator rather than a responder. Initiators have a concrete game plan in mind. They have made the effort to develop a strategy that specifically takes into account both their long-term financial goals as well as their own personal investment temperament. It is shaped around what they hope to accomplish in the future, and it fits who they are "inside."

Make it your goal to become an initiator! Be like a shopper at the food market who buys only those ingredients needed to prepare a specific recipe. Before she goes to the supermarket, Cindy knows what she is looking for. When she is confronted with special promotions for products that aren't on her shopping list, she readily passes them by. Cindy won't need to spend any time at all considering whether to buy them because her shopping is purposeful. Similarly, before you begin to invest, put together a strategy that takes into account the risk of loss you can comfortably carry both financially and emotionally.
— The Sound Mind Investing Handbook

In other words, your investing decisions should always be made on the basis of a personalized strategy. Furthermore, your plan should be in writing. If your intentions are not down in black and white, with specifics spelled out, I have to wonder how committed you are. For example, who would you say is more likely to realize his dream of taking the family (grown kids and spouses, all the grandkids, the whole clan!) to Bermuda for a two-week vacation? There's Jack, who says he has every intention of doing it someday, and there's Tom, who talks about doing it in 2008 and can show you the cost estimates he's collected and the written savings plan he's started which is going to pay for it all?

If it's not in writing, it's merely an idea, a good intention. So, develop your plan and write it down. Keep it visible. You'll be tempted to deviate from it — like when your brother-in-law calls with a hot stock tip, or the new car models come out and you'd rather spend than save — but don't do it. Hold yourself accountable for carrying it out as planned. Stay the course.

Let's apply this "write it down" principle to a task faced by many Level 3 investors each year — transitioning from your SMI "getting started"  portfolio to a more diversified Level 4 strategy. Let's assume your investment account has grown from humble beginnings, and now exceeds $25,000. This is significant in the SMI scheme of things, because this is the point at which we recommend diversifying more fully if you wish, implementing the Fund Upgrading strategy that has proven so profitable in recent years. (There's nothing magic about $25,000. I picked it because you want to have enough so that your smaller positions can still meet the most common fund minimums. This way, even a 10% allocation amounts to $2,500, and that's enough to buy into most funds via the discount brokers we recommend.)

Let's say your Level 3 account has been invested at Vanguard according to our suggestions. It's up to you which discount broker you choose for your new Level 4 account, but for purposes of this illustration, I'll use TD Waterhouse. Now, how do you get from where you are now to where you want to go? You make a list of the steps you need to take:

1. Call Waterhouse. Tell them that you have an account at Vanguard that you'd like to move to their fine firm. Ask them to send you the forms for you to complete and sign that will authorize them to handle the transfer for you. Or, if you're comfortable going online, the forms you need can be downloaded from Waterhouse's website.

2. Liquidate your Vanguard holdings. With either a call or via the Web, sell your fund holdings and have all the proceeds deposited into your money market account. It is this money market account balance that you will instruct Waterhouse to have transferred to your new account.

(Minor digression: When you do it this way, your assets will not be invested in the markets during the transfer period, which can run two to four weeks. Depending on how the market does during this period, your absence can be good, bad, or immaterial. If you wish, this can be avoided. Rather than liquidate your holdings, transfer your various Vanguard fund shares to Waterhouse. This will keep you invested throughout the process; in fact, you likely won't be able to sell even if you want to. When your shares arrive at Waterhouse, you can then continue to hold them, or sell them (you might be assessed a transaction fee for this) and buy something else. The easiest, cleanest way is to liquidate everything, transfer the cash, and start fresh with the purchases you make in your new Waterhouse account. But I thought I would let you know that this other option exists also.)

3. Plan your new Upgrading portfolio by following these three steps.  The instructions will walk you through how to allocate your portfolio between the various asset classes as well as which fund(s) to buy in each class. The result will be a broadly diversified portfolio tailored to your age and risk tolerance.

4. Invest according to your plan. After the money has been transferred, call Waterhouse (or use their Web site) and instruct them to move money out of your new money market account into the various funds you selected in step three.

5. Keep on investing according to your plan. Eventually, some of your funds will falter in their performance. You'll receive your newest issue of SMI and see the news — one of your funds is being removed from the recommended list and another is taking its place. It's time to sell the old fund and buy a new one from the recommended list. (For your replacement, we suggest buying the fund that is currently ranked highest in momentum in its risk category.) Don't hesitate. Don't delay. More often than not, you'll be better off if you ignore any applicable redemption fees, transaction fees, or tax consequences. As Nike says, "Just do it!"

Steps one through four were fairly straight forward, and should not have posed any major problems. Oh sure, steps two and three involve some subjectivity. It would be nice if there were absolute rules which you could follow and be guaranteed to arrive at the most profitable outcome. But we're all subject to the same uncertainties when it comes to future market behavior, so just do the best you can. The important thing is that you have used the information at hand to come up with a reasonable plan with which you're comfortable.

Step five is where some people have trouble. Their strategy is in place, but they get distracted by news headlines and recent market behavior. Perhaps they read that small company stocks will be hurt more if the economy slows, and begin to second-guess their plan to invest a portion of their portfolio in small-caps. Or they see an interview with a money manager who doesn't believe it will pay to invest outside the U.S. this coming year, so they begin wondering about buying that Third Avenue Intl Value fund. At this point, it's important they "make decisions of reason, not decisions of emotion." It's their fear that's sidetracking them. There will always be the possibility of loss. There will always be reasons to wait.

So, what do you do at the crticial decision points? You get out your plan and read it. And you do what it calls for, what you planned to do. You have to learn to proceed with your plan despite your fears. Your plan, if it's a good one, will minimize your risk of loss through adequate diversification and a long-term time horizon. This is where having your plan written out, along with your notes as to why you created your plan as you did, can be a help. Keep it handy as a reminder. Refer to it whenever a decision is required. You've planned according to your goals. Now invest according to your plan.

• How I'm Remodeling My Portfolio for 2005
• Investing Principles page
• 5 Easy Steps to Start Investing the SMI Way 
• Upgrading: Easy as 1-2-3 
• Getting Started Portfolios 

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