Wise investing is often simple, but it isn't always easy. While the principles of smart investing are fairly straightforward, implementing these principles can be difficult at times. That's primarily because of our emotions. When the market falls, fear tempts us to sell. When the market rises, greed tempts us to take more risk.

One of the best steps to minimize the impact of emotion in investing is to develop a written investment plan. If your plan is: (1) based on sound investing principles, (2) written when you are in an objective, level-headed mood, (3) tailored to your specific circumstances and goals, and (4) if you're married, developed with the input and buy-in of your spouse, then it will greatly simplify your decision-making and make your investment journey more profitable — and peaceful.

Below are suggestions for writing such a plan (and yes, actually writing it down is important!). You should be able to pull out this document at times of market stress to keep yourself on course. We'll use a fictional couple, John and Mary Smart, as an example.

The essential elements

  • Objectives
    In the first part of your plan, describe your specific investment goals and timeframes. As with many people, retirement is a primary investment goal for the Smarts. While the Bible doesn't point us toward the "life of leisure" type of retirement our culture promotes, wise stewardship requires that we anticipate a time when our health or other factors may create a need to slow down. At that point, most people need a nest egg large enough to support them. John and Mary's specific goal is, "To have $1.5 million saved in a retirement portfolio by the time we are 70," a figure they arrived at after a thorough analysis.

    Another common investment goal is to help children pay for college. The Smarts have two children they expect will one-day be college-bound — four-year-old Sam and eight-year-old Julie. John and Mary's goal is, "To save $60,000 for each child by the time they are 18 years old." This figure was determined by estimating how much college is likely to cost by the time their kids are ready to go and deciding the portion of that they would like to cover. (Use the College Cost Calculator found at SavingForCollege.com.)

  • Accounts and portfolios
    Next, describe which funds are designated for each goal. At SMI, whenever possible we recommend viewing multiple accounts that are designed for the same purpose as being part of a single portfolio. For example, John and Mary's retirement portfolio consists of three accounts: John's IRA, Mary's IRA, and John's 401(k). This approach of looking at separate accounts as one single "bucket" makes the asset-allocation process easier and is usually less expensive, since each recommended fund only needs to be purchased once (for the broad portfolio) instead of once in each separate account.

    However, college accounts are different. Each child's account represents a personalized portfolio. While the goal of each account is the same, their different ages mean that the approach and allocation of each account may differ at times. The Smart's chosen savings vehicles — 529 Plan college-savings accounts — have design features that actually require they be treated as individual portfolios, including the fact that the funds in a 529 Plan account must be used for a single beneficiary.

  • Strategy
    Describe the investment approach you have chosen for each portfolio. Fortunately for them, John's 401(k) account provides him with a brokerage window, allowing John and Mary to divide their retirement portfolio as follows: 45% to SMI's Fund Upgrading strategy, 45% to Dynamic Asset Allocation, and 10% to Sector Rotation.

    In each college-savings account, the Smarts have chosen to use age-based portfolios, which automatically determine the asset allocation based on how much time a child has before he or she will be college-age, with the allocation gradually becoming more conservative as the child gets older. While this approach can have pitfalls, after investigating the specific allocation changes that will be made at each step within the 529 plan they are using, they're comfortable with that approach.

  • Asset allocation
    Describe the specific asset allocation you have chosen for each portfolio and why. If you haven't done so already, take the SMI temperament quiz. The combination of your investment temperament and how much time you have until retirement will determine the recommended allocation for your retirement portfolio. This information is needed for anyone following the SMI Fund Upgrading, Just-the-Basics, or Enhanced Just-the Basics strategies. While John's temperament is that of an "Explorer" and Mary is a very conservative "Preserver," they agreed to meet in the middle as "Researchers." With more than 15 years until their intended retirement, the recommended asset allocation for the Fund Upgrading portion of their retirement portfolio is 100% stocks.

    As for the Smart's college investments, the plan's default setting for four-year-old Sam's account is 90% stocks and 10% bonds. Eight-year-old Julie's account is 80% stocks, 15% bonds, and 5% cash.

  • Contributions.
    Write down how much you will contribute to each account each month. Ideally, these contributions would be set up as automatic investments. John and Mary have decided to automatically contribute 15% of John's salary to his 401(k) plan, which amounts to $1,200 per month. They have also committed to contribute $200 per month to each of their kids' 529 Plan accounts, which they are doing through an automatic transfer from their checking account.
  • Rebalancing.
    Describe how often you will rebalance your portfolios. As SMI recommends, John and Mary have committed to rebalancing their retirement portfolio each January. Their college accounts are automatically rebalanced.
  • Market events.
    Describe how you will respond to significant market changes. This was always one of the most challenging aspects of John and Mary's lives as investors, until they created a written investment plan. They often had heated, emotional "discussions" during times of high market volatility. After talking about it at length, and through numerous revisions, they agreed on the following statement.

"We recognize that the stock market is cyclical. It rises and falls. No one can accurately predict when it will move in either direction. By being intentional about our asset allocation and diversifying our retirement portfolio across the three strategies of Fund Upgrading, Dynamic Asset Allocation, and Sector Rotation in the manner we have chosen, we believe we have adequately positioned ourselves for growth while also building in prudent protection against loss.

"We are committed to staying the course through the market's ups and downs. At the same time, we will heed SMI's Bear Alert  to lower our risk in two of our strategies. If a bear market is signaled, we will move our Fund Upgrading portfolio to 80% stocks/20% bonds and we will move our Sector Rotation funds to cash, returning both to their previous positions with an SMI All-Clear signal. Otherwise, we will tune out the noise and stick to this plan." (Note: While reducing — or eliminating — one's Sector Rotation allocation during bear markets isn't an official element of the Sector Rotation strategy, it's a permissible step that some readers might elect to build into their plan.)

This is the most important part of the Smart's plan — as it likely will be for yours. What to do during times of unusual market volatility is best decided when the market is calm. Think, pray, and talk about what you will do at such times, and then write it down. When the market goes crazy, as it inevitably will, let your written, well thought-out, thoroughly discussed, long-term investment plan be your guide. It will prove to be a much better guide than your emotions during those potentially stressful times.

No matter what the market does, review your plan at least once a year. A good time to do so is early January when you rebalance your portfolio. Discuss any changes that may be appropriate because of your age or new goals. Then commit to following your plan for the year ahead, keeping in mind (and heart) the words of Proverbs 21:5. "The plans of the diligent lead to profit as surely as haste leads to poverty."