Before Investing, Develop a Plan

Now more than ever, you need to develop and stick to a carefully thought-out investment plan.

Don't have one? Take some advice from Larry Swedroe, director of research for St. Louis-based Buckingham Asset Management, and author of several useful investing books, including "The Successful Investor Today" and "The Only Guide to a Winning Investment Strategy You'll Ever Need."

Swedroe first notes how few investors even have a plan. "You wouldn't start a business without a business plan, but many or most investors jump in without any investment plan," he says.

You're best off mapping out a customized plan with an investment adviser, but you can get a head start with some suggestions from Swedroe. First, he says, focus on asset allocation, not stock-fund or mutual fund selection, because asset allocation drives the bulk of returns. (Swedroe also is a strong proponent of investing in broadly diversified passive index funds.)

When it comes to taking risks in investing, he suggests thinking in terms of a three-legged stool: ability, willingness and need. A worker with little employment risk and a stable income, such as a tenured professor or a police officer, can afford to take more investment risks. A young worker with a long investment horizon also can take more risks.

Willingness to take risks depends on the person. Ask yourself if you'll pass the sleep-well test in a bear market, he suggests. "Most people are overconfident in their ability to take risks," he notes.

Here's what Swedroe says about the need to take risks: "The very people with the most ability to take risks -- the rich -- have very little need."

In stocks, Swedroe recommends holding a globally diversified portfolio with at least 20 to 40 percent in international stocks. He likes to put a healthy dose of emerging-markets and small-company international stocks in his clients' international portfolios because these two classes have relatively high expected returns and particularly low correlations with U.S. stocks.

In normal times, and especially today, Swedroe doesn't like to take risks in bonds. He sees them as a dampener of portfolio volatility, enabling investors to stay the long-term course in volatile stocks. He shuns high-yield bonds and prefers bonds with maturities of three years or fewer. The best diversifiers, he believes, are high-quality bonds such as Treasuries, Treasury inflation-protected securities and triple-A-rated municipals.