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Failing to Plan, Planning to Fail

Vince Lombardi, the legendary coach of the Green Bay Packers, has often said that there is no such thing as a perfect game. You cannot control the weather, the referees, injuries or any number of other variables. You can, however, have a perfect practice – with a plan to respond to any eventuality.

In investing, there is actually a great deal that you cannot control. Planning, however, is one of the few things you can control. Regrettably, most investors do not do this and we see many of them failing to plan. They either believe they can wing it or simply don’t know where to start. Yet, it is a mistake these very same individuals would never commit in their businesses.

No one that achieved any meaningful entrepreneurial success simply sat in their office and reacted to whatever came their way. They planned, strategized, set goals and worked diligently towards meeting them. For some reason, once these successful entrepreneurs sell their business and start investing, they forget the essentials of breeding success. They treat investing like it’s a lottery instead of a business. They may have some strategy, but certainly no plan. That is precisely how smart people make silly investment mistakes.

The fact is planning isn’t sexy or exhilarating, but we have to pick our poison, and the pain of planning is far less excruciating than the pain of regret.

For starters, planning involves being crystal clear about your goals, because not knowing where you’re going will make it difficult to end up where you would like.

The most basic goals include:

  • What are my needs and/or aspirations?

  • What kind of return do I need to get me there?

  • How much liquidity do I need?

  • What cash flow do my investment need to provide for me?

Once those goals have been identified and quantified, the next step is outlining the parameters for meeting those goals (and if they’re even feasible). This would include questions like:

  • What kind of risks can I tolerate being exposed to?

  • What will keep me up at night?

  • How diversified do you need (want) to be?

  • What types of assets should I avoid?

  • How should those assets be allocated?

  • How long is my time horizon – for the individual holdings and the portfolio as a whole?

  • How will I measure my success, and to what are you comparing your results?

  • What are the tax implications, and are there any ways to be more thoughtful about them?

It is important to consider each of these questions, but it is infinitely more important to write down your responses to each of these, and other questions that will serve as a guiding constitution for your investment decisions. [This investment constitution is often referred to as the Investment Policy Statement, but, as long you make one, you can call it any name you like.]

Every investment decision should be made on the basis of what role it will play in your portfolio and, in the bigger scheme of things, how will it bring you closer to your goals? If that question can’t be answered, forgo the investments.

This will be difficult when your friends and neighbors are making glorious returns or, conversely, when they are panicking. Most investors are lulled by fear or greed, but focusing on one’s goals and doing only what is necessary to achieve them, will ensure that you do what most cannot. As Robert Schuller once said, “Spectacular achievements are always achieved by unspectacular preparation”.

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