How to Get Investment GPS

Investors need good directions.


A financial plan is a lot like a GPS in your car. If you don't establish a financial plan—a roadmap that will put you on the right path to reach your goals—you're apt to make bad decisions and get lost. My car has GPS because, quite honestly, I have a bad sense of direction.

Many folks have a mish-mash of investments that can lead them the wrong way. A friend or family member brags about a great fund they recently bought, so you buy it. Then you see a pundit on TV recommend a stock, so you purchase that too. Before you know it, you have pools of money all over the place with no cohesive strategy. Or you're afraid of the markets and are stashing all your cash in a savings or money market account earning very little interest.

[See Mutual Funds Are Not Buy-and-Forget Investments.]

That's why you need a plan. You know your destination, but you need directions from the GPS to get there. The first thing to do is identify your goals. For many people, the top priority is saving for retirement, so make sure you're contributing to a tax-deferred account such as a 401(k), individual retirement account (IRA), or Roth IRA. The reason is that other goals such as buying a home, paying for college, or starting a business can be reached by getting a bank loan or college scholarship. You can't get a loan or grant for your retirement. If you have money left over after contributing to your retirement accounts, you can save for your other goals.

The next step is to diversify your investments. Decide how much money you want to allocate to stocks, bonds, and cash investments such as CDs and money market funds for each investment account. This depends on your time horizon for each goal and your tolerance for swings in the value of your portfolio, as well as economic conditions. When you figure out how much money you want to put in stocks and how much risk you're willing to take, you can pick among the different types of stocks—growth or value, large-cap or small-cap, domestic or international. Mutual funds are the best way to own a group of stocks and bonds, because you won't be exposed to drastic moves in any one security. Having exposure to many different areas of the market lets you participate in positive cycles and also provides protection if the market turns south.

Check your portfolios regularly—every quarter, if possible—to make sure your investments still fit your needs. Rebalance as necessary. When you're on a long road trip, you periodically check the map on the GPS screen to make sure you're still going in the right direction. You can adjust your allocations to certain sectors and other assets when earnings and economic outlooks change. And you can easily switch mutual funds if you're not thrilled with the way your funds are performing.

However, don't make decisions based on daily market moves. There are no shortcuts in investing. Many individual investors tend to buy high and sell low. You want to do the opposite. Another reason to avoid market timing is costs; for many investments, these rise because you're trading more. Stick to your plan and make changes only when needed.

It takes effort to figure out your goals and evaluate each investment for them. If you don't have time to establish a plan on your own, hire a financial adviser to help craft one. Once you set up a plan and have confidence in it, you'll have investment GPS and be on your way to reaching your destination and goals.

Adam Bold is the founder of The Mutual Fund Store, which provides fee-only investment advice with locations coast-to-coast. He's also host of The Mutual Fund Show, a call-in radio program broadcast across the country. Bold is author of the book The Bold Truth about Investing (April, 2009). Bold is Chief Investment Officer of The Mutual Fund Research Center, an SEC registered investment adviser which provides mutual fund and asset allocation recommendations and research to stores in The Mutual Fund Store system.