Making It Easy On Yourself
To "Do The Right Thing"

When the stock market experiences sharp downturns, as it did in February/March and again in early June, 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." (See Make Sure Your Investment Decision-Making Is Inside-Out.)

It's at this point 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. 5 Easy Steps to Start Investing the SMI Way  has the basics you need to get started, with more information available in The Sound Mind Investing Handbook.

If it's a question of emotional stress, perhaps the following will be of some encouragement. The examples are directed primarily to Level 4 investors, 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 we try to offer strategies in SMI that minimize the wear and tear on your emotions, where consistently doing the right thing comes more easily.

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, we don't mean always making the most profitable decision. That's impossible. Rather, we 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 we 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 (see Upgrading: Easy as 1-2-3  ). 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. We 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 the Recommended Funds Report  each month and perhaps place an online trade or two. Our indexing strategies only require annual attention. (Level 3 investors need only check the Getting Started  pages once a quarter.)

• 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. As we pointed out last month, leadership constantly rotates among the stock risk categories. Being well diversified ensures that inevitable periods of weakness in one part of the market won't torpedo your whole portfolio (see The Guardrails of Diversification).

• Doing the right thing is easier when you make commitments a little at a time. Most months, we suggest only a few stock fund changes. Depending on what you currently own, you may not even be affected in any given month. If you are, the changes represent just a portion of your holdings. That's much easier than changing your whole portfolio. 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. In 2006, our margin of victory over the market was the slimmest it's been in the past eight years. In 2000 and 2002, Upgrading beat the market but ended up losing money (see SMI's Performance History page). 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) beyond childish things 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.

• SMI Investing Strategies
• Make Sure Your Investment Decision-Making Is Inside-Out
• Six Principles for A Solid Investing Strategy

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