SMI executive editor Mark Biller talked about the key "building blocks" of a successful long-term plan on Monday's MoneyWise Live from Moody Radio.

To listen, click the play button below — or, if you prefer, scroll down for a transcript. (And for more radio appearances by members of the SMI team, visit our Resources page.)

MoneyWise Live, with hosts Rob West and Steve Moore, airs daily at 4:00 p.m. ET/3:00 CT.

To ask an investing-related question on a future program, call 1-800-525-7000.


Transcript

Steve Moore:  The stock market is a funny place. Whenever one guy sells, another guy buys. Where else can two people do the opposite thing and they both think they're awfully smart?

Well, we want to help you be smart today whether you're buying or selling. To do that, our host Rob West sits down with Sound Mind Investing's Mark Biller to lay a solid foundation for your investments — on MoneyWise Live.

Well, Rob, our guest Mark Biller is the executive editor at Sound Mind Investing, but he's traded in his sweater-vest for some overalls today because we're doing a little construction — figuratively speaking, of course.

Rob West:  That's right Steve. We will go over the five essential building blocks for investing. And Mark, always a joy to have you with us on MoneyWise.

Mark Biller:  Thanks, guys. Good to be here.

Rob West:  So Mark, what's the first building block for successful investing no matter what the market's doing?

Mark Biller:  Well, you know, here at SMI we talk a lot about having a long-term plan. And this first building block is actually a little bit more specific. It's actually writing that plan down. And the reason that's so important and we make that distinction, Rob, is a lot of people think they have a long-term investing plan until the market drops, you know, 10% over two weeks. And then they realize that what they actually have is kind of a vague collection of ideas about how they think they want to invest. And unfortunately, those vague ideas just aren't worth a whole lot at 3:00 p.m. on a Friday afternoon when the market's already down 5% on the day. And there's no end in sight.

Rob West:  Yeah, y'know I have that conversation often with callers. In fact, just in the last couple of weeks, somebody says, I feel like I need to be more aggressive in the market. Is that a good idea? And I usually follow that up with saying, if you're fully invested, let's say your portfolio is down 25% or 30% in a given quarter, are you still sleeping well at night? How are you doing at that point? And you know, the answer to that question is so telling about whether somebody can really weather that storm.

Mark Biller:  Yeah, absolutely. And that's, that's why we stress having that written long-term plan, because most people they can handle investing success just fine, but knowing how you're going to handle the worst, that's where the rubber hits the road. And that's why we say that in your plan you really need to have clear-cut, easy to understand rules that reflect your current financial limitations and reflect that balance between your emotional comfort zone and your need for capital growth. 

Rob West:  Well that is so key. And as husband and wife, if you're married, oftentimes one will have a bent toward being a bit aggressive than the other. And so you have to weigh that in as well. All right, Mark, what is the next building block?

Mark Biller:  Yeah, so the next core building block is to carefully consider your most important investing decision — and that is your asset allocation. Now that's a surprise to a lot of people because a lot of investors think it's their specific investment choices — say, buying Amazon versus Microsoft — is what determines their results. And those choices are important. But the most important decision is how much of your portfolio is allocated to stock type investments and how much is allocated to safer investments like bonds. And some studies have suggested that as much as 90% of your long-term results can be traced to that fundamental asset allocation decision. And of course, as as we talk about a lot on these programs, Rob, the key here is time over short periods, stocks are very volatile. Over the long-term, you can be reasonably confident they'll outperform bonds, but as you get closer to your retirement date, you need to be scaling out of those riskier stocks and into safer stuff like bonds.

Steve Moore:  Okay. We're chatting with Mark biller today from soundmindinvesting.org — and our discussion today, foundational building blocks of investing. We'll be back after this.


Rob West:  Mark, take us into number three.

Mark Biller:  Yeah. Third principle is to maximize your tax-advantaged investment opportunities. And that means making the most of retirement savings plans that might be provided by your employer, like a 401(k), a 403(b), and possibly adding an IRA as well. If your employer doesn't offer you a 401k or other type of retirement plan, then definitely opening an IRA and using that to save for retirement.

Now, Rob, we've done whole MoneyWise programs before on how to decide between these various types of plans, but — over-simplified just a bit — generally speaking, younger workers should really be considering a Roth 401(k) or IRA. Older workers really need to run the numbers because sometimes the traditional versions of those plans may be better for them as they get closer to retirement age. And there are links to more information in the article that we're discussing at soundmindinvesting.org if listeners want to dig into this topic a little further,

Rob West:  Yeah, we get that question often as well. Do I take a Roth or a traditional? And it really is all about planning and when you plan to take in a tax-efficient manner. All right, Mark, we've got two more. What is the next building block for successful investing? 

Mark Biller:  Yeah, so the fourth building block is choosing the right investment strategy and that's not always an easy decision. Y'know, the most important point here is that you believe in your chosen strategy enough to be able to stick with it during the inevitable downturns. One thing a lot of people don't necessarily think about is every strategy is going to have different strengths and weaknesses and every approach is going to falter occasionally. Now what happens is people tend to jump from one approach, one strategy to another at these weak points, and that's a really bad formula for building long-term wealth.

I'll give you an example. Indexing has beaten just about every other type of investing approach over the last decade, but the weak part of indexing is it really doesn't offer any downside protection during bear markets. So our concern is that there are a lot of investors who've started using index funds within the last 10 years that have never been through a bear market with them and have never really thought about what's the downside of this particular approach.

Now, to be fair, one of our — at SMI — one of our four main strategies is an indexing strategy. So it's not at all that we're anti-index funds. It's just you have to think through these pros and cons. And we also have some other options that people can blend in that offer better downside protection. So the main point here is simply that regardless of whatever strategy you choose, you need to know what you're getting into, and what those strengths and weaknesses are going in. so that you have the ability to stick with your strategy through the inevitable tough periods.

Steve Moore:  But Mark, if you're, uh, almost fully invested in index funds and you go through a bear market, we all know that ultimately that's going to come back around. So what's the issue? What's the problem? 

Mark Biller:  Yeah, well, of course it may come back around, but the timeframe on that may not match up with your investment timeframe. So that's a big key. And also to be clear, there are ways of putting index funds together that are not giving you straight, you know, a 100% exposure to the stock market. And what we get concerned about is a lot of people equate investing in index funds to investing in the S&P 500 index. And that's going to be a really rough ride for a lot of folks. We're afraid when we get to the next bear market. 

Rob West:  By the way, all of these strategies Mark is talking about are described in detail in this article called Building Blocks at soundmindinvesting.org. Mark, what is the last foundational principle for successful investing?

Mark Biller:  Yeah, the last principle is to run your retirement numbers and occasionally make adjustments and that may seem a little tricky. Uh, it doesn't really need to be at a big picture level. We're talking about periodically going through these first four steps that we've been talking about as well as revisiting your budget because your budget needs will change as life goes along. And, and there are a thousand factors that might cause you to adjust your plan as you go. You just want to make sure you're not abandoning your old plan without putting a new plan in place.

And as far as your investments go, you really don't want to make changes to your plan just because of what the market is doing. So say the market's down 20% you're starting to panic and you're changing your plan. That's not the way to go about it. But a periodic review that makes you convinced on an unemotional basis that a change would be warranted. Sure. You need to have some flexibility to build these reviews, these periodic reviews and possible changes into your plan.

So I guess circling all the way back around to where we started, Rob, you know, you just want to make sure that any changes you're making are based on your needs and goals, not on the news of the day. We, we refer to that as being an inside-out investor instead of an outside-in investor. You don't want to be reactionary, you want to be intentional about the changes you're making, your plan.

Rob West:  And all of that sounds well and good until the market is in the midst of one of those periods where it seems like it's free-falling and our best-laid plans go out the window and we start to react emotionally. And that's why it's important to think about, pray about, anticipate those periods now so we can be ready for it and stay the course. And that's of course where some accountability can come in as well through an investment professional. Right?

Mark Biller:  Yeah, absolutely. And, and even if you're not working with a professional, that's where having a plan written down almost gives you your own accountability to yourself. Because if your plan says, "This is what I'm going to do and this is how I'm going to handle the next market downturn," well that's going to help you when it actually does come around, because you'll be basically reminding yourself, "This is what I don't want to do and this is what I need to do."

Steve Moore:  Mark at the top of your newsletter, on the masthead, there's a Bible verse. What does that have to do with what we're discussing today?

Mark Biller:   Yeah. Well. people wonder sometimes about that "Sound Mind" — and that is simply that "God hasn't given us a spirit of fear but of power, love and of a sound mind." So all of these principles are just trying to apply that godly wisdom and make it very practical. How are we going to make that practical? Well, one way is writing it down and being able to remind ourselves. It's almost like, you know, in the Old Testament how the Lord told the Israelites over and over: Remind yourselves. Remember, remember, remember. And that's really what we're driving at today.

Rob West:  Sound advice from Mark Biller today. Mark, thanks for stopping by my friend.

Mark Biller:  Thanks, guys. Good to be here.

Steve Moore:  Mark Biller has been our guest. He joins us on a monthly basis. You can read more about these principles and strategies in his article, The Core Building Blocks of Successful Investing at soundmindinvesting.org.