Wednesday, April 14, 2010

Sticking to a Plan

We often hear the investing advice “have a plan and stick to it.” Unfortunately, these words don’t seem to convey the intended meaning to the investors who most need to hear it.

When I first started DIY investing, if someone gave me this advice, I would have thought “my plan is to invest in things I think will go up and sell the things I think will go down, and I’ll stick to that.” Unfortunately, this has little to do with what people mean by the sticking-to-a-plan advice.

A big problem for many investors is following the herd. They buy the hot stocks at sky-high prices because everyone seems to like those stocks. Later they sell holdings at low prices because everyone seems to think selling is a good idea. Following the herd can cost you a lot of money if you act after the herd has acted.

An example of a plan is to have a particular asset allocation with fixed percentages of your assets in stocks, bonds, etc. Sticking to a plan means not abandoning these percentages when the investing herd is thundering in one direction and you’re tempted to follow them.

I’d like to find some other way to express these ideas other than “have a plan and stick to it” because I don’t think this expression helps novice investors much.


  1. Maybe it should be, "Set your goals and adapt your plan as needed"? If the plan has goals, it might help, but it might also cause wild plan changes as well to attempt to get to the goal quicker.

    Set your parameters and stick to it?

  2. Hi Michael,

    There may be no equivalent sound-bite suitable for true novices. If there were, it might sound like "educate yourself about investing before committing huge sums of money to your plan".

  3. Big Cajun Man and Patrick: In some cases, I would say "don't adapt your plan". Patrick is probably right that there is no short way to convey the required message. No matter what is said there is a way for people to convince themsleves that they doing the smart thing when in fact they are acting out of fear or overconfidence.

  4. I like the allocate and rebalance approach, but I'm afraid too many people might "rebalance" too often or misunderstand exactly what that means. They may actually develop a habit of changing their allocation rather than simply buying or selling securities to maintain their original allocation.

  5. Understand why having a plan is a good idea. Understand the rationale behind every aspect of your plan. Believe every aspect of your plan represents an intelligent thing to do.

    If you understand what you are doing and if you believe it's a sound plan, then you can stick to it almost all the time.

    Throw together a plan - especially when someone else suggests it (for a fee) - then there's no reason to adhere to it.