Time Your Next Investment Perfectly

Professional money managers have become quite prolific. They're penning lengthy shareholder letters to calm clients' nerves and convince them to keep their money put.

Many of them are touting patience and temperament, which are good traits to have in spades these days. But the best investors know that it doesn't require nerves of steel or a stiff drink to recoup losses: It requires a plan.

How One Pro Plays Uncertainty

Consider Jeremy Grantham's recent letter to shareholders. Grantham, co-founder of investment firm GMO and a highly respected fund manager, says his company is making big investments instead of a lot of small ones, by reinvesting its cash in large chunks. "A single giant step at the low would be nice, but without holding a signed contract with the devil, several big moves would be safer," Grantham says. "We made one very large reinvestment move in October, taking us to about halfway between neutral and minimum equities, and we have a schedule for further moves contingent on future market declines."

Grantham's strategy is to watch out for competing costs (investing too soon) and regrets (missing handsome returns from market rallies) -- an exercise that every investor should do. Your plan need not be sophisticated, either. "[A] simple, clear battle plan -- even if it comes directly from your stomach -- will be far better in a meltdown than none at all," Grantham says.

3 Steps to Getting Back in the Game

There are several ways to structure your get-back-in-the-game plan. Here, again, it pays to cheat off the smart kid's homework. Sir John Templeton, an investor's investor, used a simple system that is now prevalent among investors, shoppers, and singles: He kept a "wish list."

This watch list of companies he wanted to buy when they reached a particular valuation helped him avoid making rash, heat-of-the-moment ("Wow! GM's trading at only a couple of bucks!") investing decisions. The money shrinks have a name for Sir John's strategy: They call it "precommitment," and it's a brilliant tactic to neutralize our natural irrationalities. Here's what to do.

1. Start a watch list. Put down the price you are willing to pay for great companies and review your list on a regular basis. That way, the next time butterflies are doing a number in your stomach, you'll have a concrete plan of action that you can actually follow. (See the "Related Links" to this story for more details on how to build a watch list.)

2. Dip in your toe to test the waters. As Jeremy Grantham (and anyone who is sane) says, it's unlikely that you are going to perfectly time your foray back into the market one day before stocks stage a massive rebound. But you can lessen your exposure to the market's ups and downs by automatically investing a set dollar amount at the same time every month. This strategy is called dollar-cost averaging, and it's an ideal way to keep your sanity while you rebuild your nest egg. If you participate in your employer-sponsored retirement plan -- a 401(k) or 403(b) -- you're automatically dollar-cost averaging.

Another way to get back on the horse is to invest in thirds. Divide the amount of money you want to commit to an investment, and then buy in at three separate preset points -- after a 10% decline or increase, for example.

3. Lather, rinse, repeat. With your investing plan in place, all you need to do is stick with it. Keep an active eye on the companies you've longed to own but that always seemed too richly priced compared with your valuation. And keep investing what you can on a regular basis -- through your 401(k) or IRA, or simply by setting up a preauthorized transfer from your bank into your brokerage account.

Now is no time to sit back and cower. Rebounds happen quickly and sitting "safely" on the sidelines costs a fortune. In other words, as famed investor Shelby Davis has said: "You make most of your money in a bear market. You just don't realize it at the time."

Fool.com columnist Dayana Yochim keeps both hands on the wheel, both eyes on the road, and her investments on autopilot.