A solid investing plan can keep you from going wobbly when the stock market turns volatile and starts trending downward.

Although no single plan is right for everyone, the mark of any reliable plan is that it is built on specific core principles. SMI's executive editor Mark Biller discussed those principles with host Rob West on yesterday's MoneyWise Live. Mark also answered questions from callers. 

Audio is posted below. Scroll down for a transcript.

MoneyWise Live airs weekday afternoons on Moody Radio.

For more radio appearances by members of the SMI team, visit our Resources page.


Transcript

Rob West:
Proverbs 21:5 tells us, "Steady plodding brings prosperity, hasty speculation brings poverty."

Hi. I'm Rob West. That's one of the most quoted verses about investing — and with good reason. It lays the foundation for a successful investing plan. Today, I'll talk with Mark Biller about six principles to help you get there. Then, it's on to your calls at 800-525-7000. This is MoneyWise Live — biblical wisdom for your financial decisions.

Well, Mark Biller is executive editor at Sound Mind Investing where they've had their noses to the grindstone, trying to keep track of today's highly volatile market. Today, well, another one of those days. Mark, welcome back to the program.

Mark Biller:
Thanks, Rob. Good to be back with you.

Rob West:
So Mark, to say that folks are a bit antsy about stocks and bonds these days is an understatement. But the SMI newsletter has an article with six principles to help us keep a level head in turbulent times. We certainly need that right about now. And you start out with a great analogy about investing — so would you share that with us to begin?

Mark Biller:
Oh, absolutely. So this article begins with the idea that investing is like riding a roller coaster while wearing a blindfold. So you can't really tell when a steady incline is about to give way to a big decline. And while my kids seem to actually enjoy riding real roller coasters, there are very few investors who have enjoyed the type of volatility and ups and downs that the market's thrown at us so far this year.

Now, unfortunately, there really is no way to make volatility completely disappear. It's just an unavoidable part of investing for most people. But you can stay steady through those ups and downs by using a well-defined and disciplined investing strategy. Now, there's not gonna be one magic bullet, no silver bullet here, a single strategy that's gonna be right for absolutely everybody. But every good long-term strategy incorporates six core principles — and that's what we're covering in this article.

Rob West:
So where do you wanna start?

Mark Biller:
Yeah, well, the first principle Rob is that success doesn't come from hoping for the best, but rather knowing how you're going to handle the worst. And what we mean by that is that since these market downturns are an inevitable part of investing, your plan needs to account for that. And the best way to do that is through diversification. That simply means that we're purposely selecting a range of investments that march to the beat of different drummers.

When we do that, when we hold these different types of investments that tend to respond differently to economic events, it helps smooth out the overall volatility of the portfolio. So the hope is that while some of your investments are zigging, others are gonna be zagging. And a lot of the modern investment business is built on research that shows that there actually are ways that you can combine these various types of assets in ways that reduce risk without sacrificing a lot in the way of returns.

Rob West:
Yeah, and that's certainly encouraging. Why take greater risk than you have to to accomplish your goals and objectives?

All right, what's principle number two?

Mark Biller:
Yeah. It's that our investing plans need to have clear-cut, easy-to-understand rules — and the more specific and actionable those rules are the better. Because if your rules are not very well-defined, it's hard to make decisions quickly and with a lot of confidence. So for example, if your plan calls for, say, "significant investments" in small company stocks, maybe it should say "30% of my portfolio will be invested in small company stocks." That's really straightforward. It's very measurable. The other is kind of wishy-washy and open to interpretation.

Rob West:
Yeah, that's such great advice. Tell us what the third principle is.

Mark Biller:
Yeah. Well, principle number three is that your investing plan needs to reflect your financial limitations. It's really important to never ignore the words "higher risk" because those mean something very important —that there's a greater likelihood that you could lose money. And every day, people who think it'll never happen to me, find out that it can indeed happen to you.

Big picture, Rob, investing isn't some kind of a game where the gains and the losses are just a way that we keep score. Money isn't an abstract thing for most people. For most of us, it represents years of working hard and saving our hopes and our dreams, and having unexpected financial losses can be devastating. So a good investing plan is gonna help ground us and discourage us from taking risks that we can't afford.

So getting really practical here, because I know it's something that both SMI and MoneyWise focus on, your top financial priorities need to be getting debt-free and building an emergency savings reserve, because those steps are gonna build the appropriate foundation that make you financially strong enough to be able to bear the risk of loss that's always present when you're investing.

Now, of course, there are some exceptions to that possibly contributing to a workplace retirement account, especially if your employer is matching your contributions. And, of course, most people are gonna be working on paying off their mortgage while they're starting their investment journey.

But it's really important to get these steps in the right order and reflect those financial limitations.

Rob West:
Clearly, you mentioned that employer match. You don't want to turn away what is essentially free money. You want to take full advantage of that if you can.

Before we get to principle number four, let me just remind you we've got some phone lines open today. Mark Biller is here and can take your calls and questions on your investing, and we'd love to hear from you. 800-525-7000 with questions for Mark Biller.

All right, Mark — principle number four.

Mark Biller:
Yes. Number four is that your investing plan needs to keep you within your emotional comfort zone. So you don't wanna take on a strategy that's gonna rob you of your peace or take you past that "good night's sleep" level. Because if you do, you're likely going to bail out on that strategy eventually — and likely at the worst possible time. So the amount of risk you take needs to be consistent with what we call your "investing temperament" [and] your "season of life."

And that's really why some sort of risk assessment process is usually part of the start-up or onboarding process when you're working with an advisor or with a service like what SMI provides.

Rob West:
Yeah, that's really helpful losing sleep over your investment account leads to bad decisions.

All right, principle number five.

Mark Biller:
Yes. Number five is that a solid investment plan needs to be realistic regarding the level of returns that you can reasonably expect. You know, over the years, we've occasionally had people ask us to recommend "safe" investments that will give them annual returns of 10% or 12% or more than that sometimes. And you know, if by safe they mean that there's little chance of losing money in those investments, there just really aren't many, if any, investments like that. Investments that are safe in that sense typically pay a lot less than 10 to 12%.

Now, you and I Rob have talked recently about how the recent spike in inflation has actually created a rare exception and that's [U.S. Government] I Bonds, which are currently yielding close to 10%. But that is a rare exception indeed because return and risk are usually very closely linked. Investments that offer higher rates of return typically do so because they have to — they have to offer these higher rates of return to entice investors to take on higher levels of risk.

So the principle here is you want to incur the least amount of risk that's going to get you to your financial destination safely.

Rob West:
Yeah. Obviously, we see when you talk about high-risk investments, that brings up the topic of these really speculative investments — the most recent flavor of which is cryptocurrencies. I recently read, Mark, the majority — over 50% — of people who currently hold them are holding them at a loss because so many have rushed in in the last two years. And obviously, we've seen a recent selloff. That would fit into this category, wouldn't it?

Mark Biller:
Oh, absolutely. Yeah, that really is the tip of the spear when you're talking about risky investments right now. But like you mentioned just a moment ago, Rob, you know, you can go a little bit down the risk ladder and hit these tech stocks. And a lot of these tech stocks are down 40%, 50%, even some 70% and 80%. So it's not just the super risky crypto stuff. We're actually seeing that with some of the more speculative stocks as well.

Rob West:
Yeah. Lots of calls coming in for Mark Biller related to investing. So before we unpack principle number six, let's head to the phones.

We'll begin today in Kansas City, Kansas. Brian, go right ahead with Mark Biller.

Caller:
I am 57 and I'm trying to put away some money for my wife who's a little younger than me. So we've been saving away and paying off the house. It's paid for it. But then my family died and I had some inheritance, so it jumped us ahead by quite a bit. And so we're ready to invest — approximately $150,000 more or less. And was just wondering, when would be — should I wait a little while, let the market drop more, or should I go ahead and just jump in?

Rob West:
Yeah, Mark, this is a great question 'cause when you're sitting on a lump sum as significant as the amount Brian's talking about, that's essentially all in cash, what's the best way to approach deploying that — in good markets or bad?

Mark Biller:
Yeah, that is a great question, Brian. You know, there are a few different approaches you can take. There's no single best way to do this. You know, one would be, of course, an investment service like SMI has, we're gonna have very specific ideas of when is a good time to invest when we are shifting from one asset class to another, from cash to stocks back and forth. So we're gonna be offering very detailed, specific advice on that sort of thing.

But that type of service isn't for everybody. And so for somebody who is just trying to handle this on their own and wants to maybe they're trying to make decisions in their 401(k) or a situation like you've got, I would just encourage them that it doesn't have to be all or nothing. You don't have to decide to put all that money to work all at once.

And one way to kind of spread that risk a little bit is to potentially split that amount into smaller pieces and deploy that gradually. That can certainly be a lot easier emotionally. Now financially, typically the market tends to go up over time, so the odds say that sooner is better to deploy the money. But I have always found that for most real people, the emotional side of that is much easier if splitting that up into a few different pieces. One idea, Brian, might be to take that and divide that into, say, three to five chunks and maybe put in a fifth of that every other month or something like that. That way, if the market does keep falling, you feel like you're taking advantage of those better prices and you haven't put it all in right before something bad happens to the market.

So that would be my suggestion there just from an emotional comfort standpoint to actually take action. Because that's really the most important thing that you're not sitting here a year from now with this same decision, not having done anything,

Rob West:
Mark, just 30 seconds before the next break. I think the big idea of what you just said, and I totally agree is you, have kind of a rules-based approach to how you're gonna deploy it, as opposed to trying to pick the entry points based on when the market's gonna hit its low point. Right?

Mark Biller:
Yeah, absolutely. Trying to pick the low is really tough.

Rob West:
<laugh> That's exactly right. By the way, if you wanna learn more about SMI, go to soundmindinvesting.org, and you can read about all that Mark just talked about.

We're gonna ask him to stick around for one more segment. We've got some lines open: 800-525-7000. This is MoneyWiseLive. We'll be right back.


Rob West:
Delighted to have you along with us today on MoneyWise Live. We're talking with Mark Biller about six principles of successful investing — plus your questions.

In fact, let's head right back to the phones. Lewiston, Idaho — Shirley, thank you for your patience. You're on with Mark Biller — go ahead.

Caller:
Yes. I'm interested in learning more about corporate bonds, and if you think they would be a good investment.

Rob West:
Yeah. Mark, your thoughts on corporate bonds.

Mark Biller:
Corporate bonds are definitely one of the asset classes that we are invested in really all of the time as part of our portfolios. It's hard to say that a particular investment is "good" or "bad" because they all tend to go through cycles, right? So particular investments at particular points in time, some are gonna be better than others.

What we've had so far this year, Shirley, is we've had interest rates really spiking higher in a rapid fashion as investors have finally started to believe the Federal Reserve when the Federal Reserve has been saying, "We are going to raise interest rates to fight this inflation problem."

So the first rule of bond investing, Shriley, is that when interest rates rise, bond prices fall. So what we've had so far this year is rising interest rates, which has led to falling bond prices. And as a result, all types of bonds, including corporate bonds have had a miserable first half of this year — one of the worst in several decades, actually. Now the question is, of course, from here, what is likely to be the path for corporate bonds? And that — nobody knows the future so you can't give a firm answer to that. But I would say that in the paradoxical way that risk works in the markets, with all of the bad news that has been priced into bonds so far this year, that actually some of the risk in bonds has actually now decreased relative to where they were at the beginning of the year. And that's natural. They've fallen in price, and as a result they are less risky now than they were at the beginning of the year.

Now, does that mean that they can't fall further? Absolutely not. They certainly can. But I am personally feeling better about bonds today than I was, say, a few months ago. And that is largely because they've already corrected now quite a bit.

So within corporate bonds, Shirley, you'll find that there's another big distinction and that is the length of the bonds. So long-term bonds are going to be quite a bit more risky than shorter-term bonds.

And typically the way that we handle all of this risk, and these various risks, is that we diversify through bond mutual funds. So there are any number of those. We like Vanguard's bond funds simply because they're well-diversified, they're low-cost. So the expenses are very low on those. And so we will typically mix short-term bonds with intermediate-term bonds as part of our bond allocation. And then we add to that through some of our actively managed rules-based strategies.

So I would say, Shirley, that corporate bonds, overall, great choice — typically gonna be fairly safe. Now, of course, there are riskier ones and safer ones, so you want to pay attention to the credit quality there as well. But if you're looking at a mainstream bond fund, like Vanguard short-term bond or intermediate-term bond fund, those are usually gonna be pretty good options, pretty safe options.

Rob, what would you add to that?

Rob West:
No, I think you're exactly right.

Question for you, Mark. You mentioned bond funds. Obviously, with a bond fund, you can't hold to maturity like you can if you own an individual bond. If you can hold to maturity, it takes the falling bond price out of the equation because if you're willing to hold it to the end, you're guaranteed the coupon. How should folks think about that piece of it?

Mark Biller:
Yeah, you're exactly right. And for somebody who feels comfortable selecting individual bonds, that is a great option. A lot of folks are nervous about doing that because, of course, it's hard to get good diversification. A lot of folks are stuck holding just a handful of corporate bonds in that situation, and then if something happens to one of those companies, they've got a problem on their hands. But that is a good option if you feel comfortable selecting those bonds yourself.

Rob West:
Yeah. And, of course, making sure you're not too highly concentrated in any one particular bond. Very good counsel. Shirley, thank you for your call.

To Woodridge, Illinois — Betty, go right ahead for Mark Biller.

Caller:
Hi, my question was — I transferred my 401(k) to a regular IRA, I rolled it over and had it actively managed. And what I noticed was that there was a great drop in the amount after everything was invested into different funds. And I'm wondering, is that normal? I mean, I was just totally surprised that it dropped significantly when I rolled it over to a managed account — and this was in December and January, from December '21 to January '22. So the market wasn't that bad.

Rob West:
Sure. Mark, your thoughts.

Mark Biller:
Yeah. I think the thing to look at there, Betty, is the decline in the market during January — because you're right there shouldn't be any decline simply moving it from the 401(k) to the IRA — that that should not cost you anything to do that.

But with the market, and especially certain parts of the market peaking last November and falling fairly sharply into January, some of those January losses were fairly steep. So I would look at exactly what you were invested in and try to line it up that way.

Rob West:
Yeah, exactly right. Betty, I'd do a little bit more investigation as to whether that came over in cash and then it was deployed and that's what led to the decline or whether the investments came over intact. And then you can probably trace the declines back to those actual investments following the transfer. But it's probably just market-related. I'd check it out a little bit further.

Mark, thanks for being with us, my friend.

Mark Biller:
Thank you, Rob.

Rob West:
All right. Soundmindinvesting.org is where you can learn more.