Investing Principle 2: Stick With Your Plan

by Mark W. Riepe, CFA, Senior Vice President, Schwab Center for Financial Research
April 25, 2008

The third article in an 11-part series on Schwab's investing principles.

Schwab's first investing principle emphasized that successful investing starts with having a plan that lays out why you're investing in the first place, and what you ultimately hope to accomplish.

Our second investing principle continues that theme: Understand your plan, follow it, and adjust it when things change in your life.

Many people have, at some point, taken the time to create an investment plan. Sadly, many of those plans are sitting around collecting dust. The best plan in the world is of no use whatsoever if you never put it into action. Similarly, a plan that made sense when you were 30 and single has probably lost much of its relevance when you're 38, married with two kids, and helping to support your parents.

I think one of the reasons plans collect dust is that the people for whom those plans were created never really understood or bought into the advice the plan contained. But taking the time to understand your investment plan is vital.

3 important steps	10 proven principles
Create a plan	1. Having an investment plan that is realistic and actionable is crucial to meeting goals. 2. Understand your plan, follow it and adjust it when things change in your life.
Put it into action	3. Saving and spending rates have the greatest impact on success. 4. Diversification is the second-most important factor in reaching goals. 5. Select the asset allocation that’s right for you and stick with it. 6. Choosing professionally managed investments can be a better way to invest. 7. Acting now generally beats waiting.
Stay on track	8. Periodic checkups keep a portfolio healthy. 9. Progress toward goals is more important than short-term performance. 10. Use the right benchmarks to evaluate performance.

Understand your plan
The good news is that taking the time to get more educated about these matters pays off. In one study¹, retirees were asked how satisfied they are with their retirement. The people were then profiled in great detail to isolate what variables explained their level of satisfaction. The conclusion? Taking the time to get more educated about retirement-planning issues correlated with higher satisfaction levels, even after controlling for other variables such as gender, marital status, net worth, income, education level, health status, and whether the person had been forcibly retired.

Another study² showed that attending educational seminars was associated with a 16% increase in wealth over one's lifetime—and the effect held regardless of a person's education level or beginning wealth.

The point here is if you're more of a do-it-yourselfer, you need to get educated as you put together your investment plan. If you're working with an advisor of some kind, that makes all the sense in the world, but don't forget to do your part by learning at least the basics so that you can ask intelligent questions and understand the thinking behind the recommendations.

This idea of understanding your plan is particularly important for families where one member of the family makes all the investment decisions. What happens when that decision maker is no longer there? The time to get both partners involved with their investments is now.

Follow your plan
The best plan in the world is of no use if you never implement it. Yet we all know how easily plans we make in many areas of our life can end up in the "I'll get to that some day" stack. To make it easier on yourself, break your investment plan into individual pieces and schedule time to check them off on a regular basis—as opposed to trying to do everything at once, which all too often leads to actually getting nothing done.

Adjust your plan
Even when you execute your plan's recommendations, don't sit on your laurels. The world changes, and so do you. If you switched jobs in the last few years, did that job switch make a meaningful difference in your take-home pay? My point is simply that your needs must drive your investment choices—don't let your investments drive you. That means as your situation changes, take the time to reflect on whether these changes will invalidate some of the assumptions on which you've based your investment plan. If that's the case, your plan needs an update.

1. Lusardi, Annamaria. "Planning and Saving for Retirement." Working Paper, Dartmouth College, December 2003, page 46.
2. Lusardi, Annamaria, "Saving and the Effectiveness of Financial Education," Journal of Financial Transformation, December 2005, page 166.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered personalized investment advice.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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Schwab's Investing Principles

Intro: Becoming a Successful Investor

1. A Blueprint for Success

2. Stick With Your Plan

3. The Top Success Factor

4. Diversification Is Key

5. Get the Mix Right

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7. Act Now, Don't Wait
8. Get Regular Checkups
9. Keep Your Eyes on the Prize
10. How to Measure Success

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