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Investing calls for plan, not guesswork

Updated: May 3, 2013 12:14PM

Originally published: March 27, 2003

The future is, by definition, unknowable. Hindsight is 20/20. Don’t confuse the two. When it comes to your retirement investments you need something more than intuition, guesswork, or market timing. You need to make an intelligent, fact-based plan and stick with it--especially when it goes against your instincts.

That’s very important these days when your instincts tell you not to “waste” your hard-earned money by making a contribution to your retirement plan or IRA. A well-diversified investment in large-company stocks (with dividends reinvested) has an average annual compounded return of 10.2 percent over the past 75 years, according to Ibbotson Research.

The word “average” is the wild card here. Having had some way above average years, it’s entirely likely that the market may have even more below average years of return. Still, if you have a long-term perspective of 20 years or more, and you’re willing to believe in the future growth of this country, your continuing investments should be well rewarded in time.

Buy and hold vs. market timing

It’s out of fashion these days to advise people to “buy and hold” stocks for the long run. Once burned, twice shy, as the old saying goes. Knowing now that money can be lost as well as created by investing in stocks, it’s easier to advise waiting for the “right time” and the “right” stock or group of stocks.

But who knows what or when is “right”?

Of course, in hindsight you would have sold your tech stocks at the top in 2000. Of course, in hindsight you would have bought an index fund 10 days ago, before the market soared 1,000 points. But you didn’t do it. And that is the lesson.

When you try to “time” the market you have to be right three times. You have to decide when to get in, when to get out, and when to get in again.

There are plenty of market timers offering their newsletters at $249 a year, or seminars for thousands of dollars. But if they really had the “secret” of market timing success, do you think they’d be selling annual subscriptions?

Sure, you can study the market and increase your odds of investment success. But there never has been a formula that works on all occasions, in all markets. Traders seek an “edge”--a slight chance to beat the 50/50 odds of the coin toss. But is that all you hope for when you invest your hard-earned dollars in a retirement account?

Make a plan, stick to it

The first step in investing is to make a plan. It has to be a plan that reflects not only historical reality, but your personal financial situation. The basics of financial planning include appropriate diversification--and an appreciation for risk tolerance. If you stick to a plan that works in the long run, but gives you a heart attack in the short run, you’re a loser, not a winner. That’s why it’s helpful to get professional guidance from people with long-run experience and understanding of human emotions.

But making the plan is only the first step. The most difficult step is sticking with the plan. It’s like dieting. That’s pretty easy when the only thing on the table is salad. But when the chocolate dessert arrives, self-discipline is tested.

Well, today the market is getting its just deserts. And, as every year, many of us are faced with the deadline for IRA contributions. So will you stick with your previous plan of making a contribution, and putting at least a portion of it into stock market investments? Or will you deviate from your plan because it doesn’t “feel right” now?

I’m writing this column for you--and for my own encouragement. Just as I had the discipline to keep some “chicken money” on the side all through the bull market, I will now have the discipline to make my own annual index fund investment. We’ll see how it works out in the long run. But from my many years around the markets, both bull and bear, the one thing I’ve learned is that you’ll never know for sure except in hindsight. And that’s The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.

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