By Todd Beaird (TMF Synchronicity) (Synchronicity)

DES PLAINES, IL (Nov. 30, 1999) -- Here in the Workshop our mantra is "Follow the Screen." One of the most difficult things for an investor to do is to make a long-term plan and be disciplined enough to stick to it. No matter how hard one tries, emotions have a way of tugging at the best-laid plans, sometimes in subtle ways.

The first example is a personal one. The rebalance date is approaching for my portfolio, which is exclusively in a Foolish Four screen. I chose a Foolish Four screen a year ago when there was limited backtest data available on the Workshop screens. Now that we have better data (much of which can be analyzed through bdfinney's and gritton's backtest sites), I will be switching at least some of my portfolio out of the Foolish Four. But how much? I have considered moving all of it, on the grounds that I'm relatively young and can withstand greater volatility. Why not go for an annual screen with a solid backtest history and a high CAGR?

Sounds fine, right? Not so fast. The workshop screens have "only" been backtested since 1986, while the various Dow-based strategies have been backtested since 1960 for January starts, and since 1965 for monthly starts (thru Hinds Wilson's Dow Monthly Database, referenced in the Foolish Four board FAQ ). If I attach so much importance to backtested history, why am I in such a hurry to drop my Foolish Four holdings?

As it happens, my Foolish Four portfolio has underperformed the market this year by a sizable amount, while the workshop screens have done very well. Last year I ran a different "paper" Foolish Four portfolio, which lost to the market as well (albeit by a small margin). So perhaps I am just coming up with rationalizations to dump a well-tested screen that has recently performed poorly. If so, that's a big mistake, as Moe Chernick has already pointed out.

You might ask "What difference does it make why you're choosing a screen, as long as it's a good screen?" Well, if the Dow-based strategies do well next year and my Workshop screen does poorly, will I come up with some other clever rationalization to switch back? A successful Workshop investor follows the screen. Those who change screens are just kidding themselves.

Another example comes from Moe Chernick's recent article, asking if one really needs three buckets. Moe points out that, if your goal is merely an "abstract" one, you might do better if you leave some or all of that money in long-term investments (Bucket C). He describes Bucket B as appropriate for money that one "can't afford to lose in the next three to five years" as opposed to money one just has plans for in the near term.

Although some people might be surprised, I agree with Moe. (Why didn't I describe Bucket B this way?) In essence, the difference is between saving for something you want to have within three to five years, and something that you need. Moe was able to apply Bucket C money toward a house (and survive the '87 crash successfully) because he truly didn't need to buy a house within five years.

However, as an investor in a time when the market can do no wrong, you have to be careful. It's easy to convince yourself that you don't care if it takes eight years to save for that down payment instead of four. It's easy, until the market drops 20% in one month (or in one day, as happened to Moe in '87), and that new home you were looking at is now three years away instead of three months. Will you really stay the course then, or will you react emotionally?

Most of us, especially guys, like to believe that we have a very high risk tolerance. We can take whatever the market throws at us. We won't care when we hit a bad stretch, we'll stick it out for the long run. It won't kill us, it'll make us stronger, 'cause we're tough!

Mix that "macho" attitude with a bull market, and you have a recipe for disaster. These kinds of investors are more likely to overextend themselves because they're afraid to "miss out" on those great returns. Also, they believe that any downturn will be easy to handle. It's easy to imagine dealing with a storm when the sun is up, the skies are blue, and the market is going up 20% every year. Then the market drops 30%, your boss tells you that the department may be "restructuring," and little Timmy needs braces. Do you stay calm and "follow the screen," or do you panic?

These are things that you should be thinking about NOW, when everything is going well. The worst time to realize that you overestimated your risk tolerance is in the middle of a crisis. Or, as some military types say, "Don't write a check with your mouth that your [backside] can't cash!"

The financial part of planning is the easy part, and the screens at the Foolish Workshop can make it even easier. It's the human element that's tricky.

Until next time, Fool on!