10. Building an investing plan This is the final Mindfully Investing article, where I’ll discuss putting the mindful investing principles detailed in all the previous Articles together into a comprehensive “investing plan” that is tailored to your specific situation. An investment adviser might call it an Investing Policy Statement (IPS). Regardless, I’m talking about a description of the rules and methods you’ll follow to meet your investing goals. Perhaps, you have only a vague idea of how you’re going to invest for the next 20 or 30 years. Or maybe you’re one of the few investors who’ve jotted down a few lines describing your investing goals and methods. I suspect very few individual investors have written a detailed investing plan for reasons that B.F. Skinner noted: “The majority of people don’t want to plan. They want to be free of the responsibility of planning.” Many influential historical figures have extolled the virtues of planning: “By failing to prepare, you are preparing to fail.” ― Benjamin Franklin “A man who does not plan long ahead will find trouble at his door.” ― Confucius “Good fortune is what happens when opportunity meets with planning.” ― Thomas Edison Of course, mindful investing is skeptical of conventional wisdom. And many mindful philosophers, such as Jiddu Krishnamurti emphasize attention to the present moment above planning for the future: “The understanding of relationship* is infinitely more important than the search for any plan of action.” Is the conventional wisdom right that planning supports better investing? Why have an investing plan? Let’s examine some common investing situations and compare what’s likely to happen with and without an investing plan in place. Market Crash – You wake up on Tuesday and see that the market has plunged by 10%. If you have a plan, you probably have a pretty good idea of what to do, or more importantly, what not to do. If you don’t have a plan, you’re likely to spend the rest of the day worrying about how to respond to market events. And what if on Wednesday the market goes down another 10% or up by 15%? Either way, if you have a plan, you’re less likely to regret Tuesday’s decisions, because you know how those decisions support your long-term goals. I’d also argue that with the guard rails of a plan, you’re less likely to panic and swerve into a rash decision. Windfall – Your rich Uncle Tyrone suddenly dies and leaves you $100,000. Because of your mindful personal finances, you can invest the windfall. If you have an investing plan, you’d already know which and how much of various assets to buy. You’d also know to invest the windfall as one lump sum rather than dollar-cost average smaller amounts over time. Without a plan, you’ll have to figure all that out on the fly, and in the meantime, that money will sit idle. Or worse, you could just start throwing money at random investing ideas. Market Timing – And perhaps your windfall came after the market has repeatedly reached all-time highs year after year, and the news is constantly warning of the next market crash.** Should you invest the money now, or wait until something happens? With a mindful plan, you’ll know that investing now is almost always the most rational move. Without a plan, you’re likely to either worry that you invested all that money too soon, or feel like you’re missing out while you wait to invest. Are You On Track? – Even without a plan, you probably have a vague investing goal in mind, like “retiring comfortably”. But how do you measure your progress toward that goal? And how do you know when your goal is potentially at risk and it’s time to change course? The without a plan you’re constantly having to make decisions on the fly, wrestling with each new situation, regretting or second-guessing your decisions, and struggling to gauge your progress. Mindful investing template The benefits of an investing plan are pretty clear. So, let’s consider how to build a plan using a template that’s consistent with the mindful investing principles described here at Mindfully Investing. If you don’t like my template, you can tailor a plan that fits you better by visiting some of the resources I’ve listed at the end of this article. I put investors into two general categories: young investors, are more than a few years away from retirement, and “old” investors, who are within a few years before or after their retirement date. Let’s assume our example template is for a young investor, who hasn’t yet accumulated substantial investments. Investing Goals – Your mindful investing plan should start with a sentence or two about what you’re trying to achieve. Retiring comfortably at a reasonable age is probably the most common investing goal. So, let’s use that as an example: Save 10% of income and regularly invest it in assets that are expected to provide sufficient returns to accumulate $2 million by the age of 55 using simple, patient, evidenced-based, and rational investing methods. The savings rate, retirement age, and monetary goal here are all just examples. To determine specific numbers that make sense for you, you’ll need to consider the expected returns of various potential assets, the number of years until you want to retire, your expected lifespan, and the income level you want or need in retirement. Existing Investments – The next step is to list any investments you may already have, which for a young investor, might look something like this. Amount
Type of Account
Type of Investment
$20,000 Home Equity Real Estate Not applicable Bank of Billabong $10,000 Retirement 401K Global Stock Fund 140 shares of VT Work 401K $5,000 Retirement 401K Global Bond Fund 90 shares of BNDX Work 401K $2,000 Taxable Brokerage U.S. Stock from Uncle Tyrone 200 shares of GE Quickie Trade A list like this will help you accurately track your overall asset allocations as you invest more over time. Asset Allocations – A mindful young investor portfolio is heavily weighted toward low-cost stock index funds with a moderate amount of diversification. This general principle gives us the following example asset types and allocation targets: 80% stocks composed of –
48% entire U.S. stock market ETF (e.g., VTI) 20% developed market ETF (e.g., VEA) 12% emerging market ETF (e.g., VWO) 48% entire U.S. stock market ETF (e.g., VTI) 20% developed market ETF (e.g., VEA) 12% emerging market ETF (e.g., VWO) 20% traditional real estate (in the form of a home) It’s important to set and evaluate these targets based on the total amounts across all your retirement, savings, and brokerage accounts. Also, I assume here that our young investor is a homeowner, which is one way to invest in traditional real estate. So, we can regard the 20% in Also, all the fund examples shown here are consistent with the mindful principle of focusing on low-cost index funds. These stock allocations are explicitly diversified across countries. Other stock diversification schemes could be equally mindful. For example, you might prefer to diversify across a variety of stock sizes (small-cap, mid-cap, large-cap), quality (value versus growth), or sectors (e.g., utilities, consumer staples, information technology, energy) However, I’ve argued that all-market funds, like the ones in the above example, do a decent job of also diversifying across these other stock types. Portfolio Mechanics – For mindful investors, the day-to-day mechanics of investing are best described as “leave it alone”. The low-cost index funds in our example template should be bought over time and pretty much held forever, regardless of what the stock market does in any given day or year. It’s easy to say, but hard to do, which is where mindfulness helps out. Nonetheless, your plan needs to describe a few portfolio mechanics including: Savings/contributions – Your plan should define how you expect to save and invest (contribute) each month***, and how each contribution will be split between the assets. This might be as simple as setting an automatic paycheck withdrawal with your employer’s 401K. Or it might involve some additional maneuvers to ensure the contribution is available and ready to be invested in a brokerage account each month. For most young investors, it’s probably sufficient to split each month’s contribution consistent with your overall target allocations. As you invest over time, you may eventually need to make some additional adjustments to nudge your portfolio in line with your exact allocation targets, which I’ll discuss next. This section of the plan would also describe how and when you would invest any windfalls as discussed above. Rebalancing – Because some assets will grow faster than others, your asset allocations may drift from their targets over time. The idea behind rebalancing is to keep your asset allocations pretty close to your targets. However, the mindful view of rebalancing is that there’s little value to the classic method of selling your fast growers and buying more of your slow growers on a regular schedule, particularly in accounts with transaction costs. But if you’re regularly contributing and buying assets anyway (like the young investor in our example), it makes sense to check your allocations and sometimes preferentially buy more of the assets that are below their target allocations. This way, you will be constantly counterbalancing recent losers with recent winners, without adding new transaction costs. Reinvesting Dividends – Most stock funds issue dividends. “Reinvesting” those dividends by purchasing more of the same funds substantially accelerates the growth of your portfolio. Your investing plan should describe your reinvesting methods. Ideally, you should use automated no-cost reinvesting options, which are available through Dividend Reinvesting Plans (DRIPs), brokerages with automatic reinvestment services, or employer retirement plans (like a 401K) that automatically reinvest. If no-cost options aren’t available to you, reinvesting dividends somewhere between a quarterly to annual frequency is likely to be cost-effective for most people. Different Tax Situations – Your investing plan should be clear on the tax implications of your various investing accounts and attempt to minimize taxes where possible. I can’t describe the tax implications of every possible combination of investments and account types. But generally mindful rules-of-thumb include: Contribute first to any employer retirement plan (like a 401K) that matches contributions up to the match level. The employer match is free money that you should take full advantage of. Evaluate whether you will pay more in total taxes by contributing now to tax-deferred accounts like Individual Retirement Accounts (IRAs) and 401Ks or after-tax Roth IRA accounts. You can use tools like this one at Bankrate to estimate which option is likely to minimize your taxes over the long term. Max out tax-advantaged retirement contributions first, and then invest any remaining savings into taxable accounts as necessary. Consider how early withdrawal penalties and Required Minimum Distributions (RMDs) for retirement accounts might impact the availability and taxation of your money. For example, if you plan to retire at 55, money in retirement accounts generally can’t be withdrawn without substantial penalties until your almost 60. And after age 70 you’re required to withdraw minimum amounts (RMDs) from most retirement accounts, except Roth IRAs. Even for the young investor, developing a general outline of your expected withdrawals later in life may help you avoid costly mistakes. Contribute first to any employer retirement plan (like a 401K) that matches contributions up to the match level. The employer match is free money that you should take full advantage of. Evaluate whether you will pay more in total taxes by contributing now to tax-deferred accounts like Individual Retirement Accounts (IRAs) and 401Ks or after-tax Roth IRA accounts. You can use tools like this one at Bankrate to estimate which option is likely to minimize your taxes over the long term. Max out tax-advantaged retirement contributions first, and then invest any remaining savings into taxable accounts as necessary. Consider how early withdrawal penalties and Required Minimum Distributions (RMDs) for retirement accounts might impact the availability and taxation of your money. For example, if you plan to retire at 55, money in retirement accounts generally can’t be withdrawn without substantial penalties until your almost 60. And after age 70 you’re required to withdraw minimum amounts (RMDs) from most retirement accounts, except Roth IRAs. Even for the young investor, developing a general outline of your expected withdrawals later in life may help you avoid costly mistakes. Market Events – Many investors plan to change asset allocations based on certain types of market conditions. But as I noted before, mindful investors, particularly young ones, should pretty much ignore market gyrations no matter how much prices plummet or sky-rocket in any given year. Regardless, if you have any “market timing” rules, they need to be clearly described in your plan, particularly the exact market conditions that will trigger specific and limited actions. More generic rules are too susceptible to convenient misinterpretations and over-reach in the heat of the moment. Tracking Progress – This section should describe how you will perform check-ups on your portfolio. Completing our example template for the young mindful investor, this section might include: Perform portfolio check-ups once per year . This frequency of check-ups balances between checking too often, which may tempt you to make unnecessary changes, and checking too infrequently, which might catch developing problems too late. Check your asset allocations. Are your allocations substantially off target? If so, revise your monthly contributions to favor under-weighted assets until they reach their target allocations. Check your portfolio total value across all accounts. Is the total value on track for your goal? It’s useful to make a simple graph projecting the portfolio growth that achieves your investing goal. Let’s say the goal is to reach $1 million after 35 years of investing. Here’s an example that assumes $8,000 inflation-adjusted dollars is contributed each year. The example uses a constant 5% nominal growth assumption for the plan (blue dashed line) and compares it to the typically erratic progress of stock investing (green line). (If you’re unsure how to calculate a constant growth curve like this one, contact me via my About page and I can send you the spreadsheet.) The green line is based on actual returns of the S&P 500 from 1917 to 1941, a 25-year period that included the end of World War I, the Great Depression, and the start of World War II. At years 15, 16 and 25, the actual growth of the portfolio is a bit behind the investing plan projection. But in each case, the actual growth gets back on track a few years later. This is another example of why buy-and-hold investing is usually successful. Check for market events that trigger actions in your plan. As I noted above, the young mindful investor probably shouldn’t have any market events to check. However, for the “old” investor it can be mindful to use ballast to buy stocks when the market declines more than 35%, as a once-in-a-lifetime response to a large market decline. Regardless, if your plan includes actions triggered by market events, your plan should be clear about how often you will check for the relevant market events, what specific data you will be evaluating, and what specific criteria trigger an action. Adjusting The Plan – The above growth graph illustrates why it’s usually the best decision to continue with your original plan. To drive this point home, here’s a graph that extends the actual growth through 1951 to complete the 35 year period. In the end, the actual growth of this example surpasses the planned growth by almost $2 million. Doing nothing successfully navigated the end of World War I, the Great Depression, and World War II. This example is based on just one historical period. Nonetheless, it’s consistent with statistics on the entire history of the U.S. stock market, which strongly suggests you shouldn’t adjust your plan unless your portfolio has substantially underperformed your projections for more than 5 to 10 years in a row. Unfortunately, the mindful options for responding to substantial underperformance are pretty limited. If you have a portfolio with a substantial amount of both bonds and stocks, your plan could reasonably allow for converting some bonds to stocks. This move takes on more risk in hopes of achieving better returns, which will require a very mindful attitude. Because such moves don’t guarantee better results, your plan should have a mindful bias towards no action and call for a careful evaluation before revising any allocations. For portfolios that contain mostly stocks, your plan might include allocation rules that take on more stock risk when your portfolio is substantially underperforming your projections for many years. Again, your plan should be skeptical about making such changes and consider the dangers of trying to time the market and chase performance. Keep in mind that the most mindful changes will often appear counter-intuitive and scary, such as reallocating more to your loser assets right when they are in steep decline. Keeping your plan current Working through the investing plan template highlights that market gyrations are rarely a good reason to revise your plan. But life is unpredictable, and unexpected life changes are often the most rational reason to adjust your investing plan. There’s a famous military dictum expressed in various ways by generals across history from Sun Tzu to George Patton: No plan survives first contact with the enemy. Or if you prefer, here’s a quote from Arthur C. Clarke: “All human plans [are] subject to ruthless revision by the powers behind the universe.” “Ruthless revisions” to your life that might require similar revisions to large portions of your investing plan include: Divorce Marriage Death of a spouse Kids leaving the nest (or coming back to roost) Unexpected major health expenses Major property damage, accidents, or disasters A large inheritance or other windfalls Major changes in income from things like losing a job or getting a promotion. In each case, it makes sense to sit down with your plan and think about how your underlying assumptions, goals, and savings levels may have changed, and what if anything needs to be done in response to those changes. Although it’s predictable, aging from a young investor into an “old” investor is another life change that will require plan adjustments. I’ve written that for “old” investors, it’s mindful to add 20% in cash, short-term bonds, or similar “ballast” as retirement age approaches and then revert back to mostly stocks a few years after retirement. So, as our young investor approaches retirement, she would update her plan to invest savings in ballast assets instead of stocks until the 20% ballast mark is attained a few years before retirement. She would then spend the ballast down early in retirement until she’s back to the 80% stock/20% Get started This may all sound a bit overwhelming, particularly if you’ve never thought about any of this stuff before. I suggest starting with developing your investing goal statement. That will probably jumpstart your thinking and clarify the personal information you need to gather to work out the additional details. Start simple and work towards adding complexity only to the extent you find that necessary. As Ben Carlson likes to say: “A bad plan is better than no plan at all.” With no plan, you’re more susceptible to random investing ideas, unproductive reactions to market events, and impulsive emotional decisions. Even a vague plan like, “invest in and hold low-cost index funds” eliminates a vast world of potentially unproductive activities and decisions. Starting simple also helps avoid procrastination. Each year that passes without a plan makes your goals harder to meet. As George Patton said: “A good plan…executed now is better than a perfect plan executed next week.” And if none of this motivates you to start your investing plan today, consider that a plan can also serve as a roadmap for loved ones in the event that your the one who unexpectedly shuffles off this mortal coil. A decent written investing plan is going to make it much easier for your spouse and relatives to figure out where everything is, what your investing methods were, and how things need to change now that you’re gone. Keep going An investing plan is one important part of successful investing, but the plan works best when it’s applied with daily mindfulness. Writing something down in a plan is not the same as sticking to it in the heat of battle. Carl Richards points out: “[Planning is] not the same, though, as actually waking up on that terrifying morning. Unfortunately, what we plan to do when risk comes up is often different from what we actually do when it does. That doesn’t make lifeboat drills any less valuable. It’s just worth understanding that in spite of all that practice, there’s still a good chance that when we face real risk we’ll tend to react differently. We overestimate our ability to tolerate risk. So it’s worth planning for that, too.” Richards seems pessimistic about our chances of reacting productively on that terrifying morning. But I’m optimistic. When we’re armed with both a mindful investing plan, which reminds of us our intentions, and daily mindfulness, which helps us avoid rash decisions, we can greatly improve our chances of responding productively to risks. A plan sitting in a file someplace can be quickly forgotten. Mindfulness helps us recommit to following the plan each and every day, no matter how disastrous events may seem. Conclusion Here’s the big “secret”. The entire Mindfully Investing website is the foundation of my own investing plan. One of my motivations for starting this website, as I sailed into early retirement, was to be absolutely sure that my investing methods were supported by logic and data rather than hype and conjecture. Mindfully Investing doesn’t include my specific investments, account values, retirement income, and other personal details. But those are just minutiae. The grand scheme of my investing approach and philosophy, which I apply every day, is here for all to see. And it’s here for my own reference and as a constant reminder of why I invest mindfully. The famous mindfulness teacher Thich Nhat Hanh wrote that he thought Leo Tolstoy was a “Boddhisatva”, which is someone who can reach Nirvana but delays doing so to help relieve the suffering of others. A Boddhisatva is a very wise person in matters of life and death. So, my most mindful quote about planning comes from Tolstoy’s journal: “No matter what the work you are doing, be always ready to drop it. And plan it, so as to be able to leave it.” Don’t get so wrapped up in your investing or planning that you miss out on life. The goal of your investing plan is not your goal for life (I hope). Although sometimes necessary, planning is often less valuable than being aware of and immersed in the present moment. Don’t take any investing plan so seriously that your happiness is dependent on achieving your investing goals. Life is so much bigger than that. Investing Plan Resources Wealth Management.com The Balance Morningstar Article Morningstar Investing Classroom Investopedia CFA Institute Cash Money Life Vanguard * You probably noticed that this is the current situation in the stock market. “Experts” have been predicting a recession and the demise of the current bull market for at least 5 years. ** Krishnamurti’s concept of “relationship” is pretty deep. But he generally means our relationships with other people, society, events, and even things. That is, understanding our interactions, both big and small, is critical to a meaningful life. *** Monthly contributions are probably the most common, but a different frequency of contribution could make sense for you. For example, self-employed investors might find it easier to contribute on a quarterly basis instead. Also, if you have accounts with transaction fees, you can avoid some cost erosion by contributing a little less frequently.
This content was originally published here.