Creating an Investment Plan
Updated: Jan 17, 2021
Originally published in The Seville Report March 2019 Issue and modified for this post.
Creating an investment plan is the first step for anyone thinking about investing. Before any investment is made there needs to be a plan in place. Investing without a plan is like building a house without blueprints, it’s not a recommended practice.
Investment plans can be multi-layered and complex or straight forward and very simple depending on what the investor is planning for.
A complex plan may encompass multiple goals and time frames, such as a 30 year investment plan for retirement, with a 10-year investment plan to purchase a home, and a 2-year investment plan to purchase a car; with an aggressive investment strategy for retirement, a mix of aggressive and conservative investments for the home purchase, and a conservative plan for the car purchase. Creating an investment plan isn’t difficult; it just requires a little bit of time on the part of the investor.
It is very necessary to have a plan as an investor. A good investment plan will help investors stay the course and avoid questionable investments.
In this article we’ll provide the groundwork for investors to create a solid investment plan. In addition we will discuss three separate strategies for an investment plan, growth, income, and safety. The investment strategies will be split up and discussed over the next several issues of The Seville Report. Grab a pen and pad or favorite note taking app and lets get
started creating an investment plan.
1. Assess the Situation
Where are you now in life? What is your age, your income, your assets, and your liabilities? This is a pretty easy task. In order to know where you’re going, you first have to know where you are, so assessing your current situation is an important aspect of the plan.
2. Define the Final Goal
Step two requires you to determine what the goal of your investment plan is. Are you investing for retirement, for early retirement, for a home purchase, for future education expenses? Whatever your final goal is, define it.
2B. Limitations or Deadlines
Now that you know the reason for investing, let’s say early retirement in this case, you have to note any limitations and establish a time frame. Limitations may be something like you have very little up front money to invest but plan to contribute money monthly or you have a large lump sum of money to invest but little to contribute monthly. Your deadlines are of
course the time you expect to retire, buy a home, pay for college, etcetera. Maybe you’re investing in order to buy a larger house in five years when your kids are a little older; in
that case your deadline will be five years. This is an important step and should be carefully thought about.
The next part of creating the plan is about filling in the gap between where you are and where you want to end up.
3. How Much Do You Plan to Invest a Month or a Year?
This is a simple step. Whatever you can afford to invest now is what should be entered into your plan. You can also note when you will be able to increase your monthly/ yearly investment.
4. Determine Your Risk (How Much Risk Are You Comfortable With?)
This is the part of the plan that keeps you out of sticky situations. Some people are more inclined to risk than others. Also a younger investor with a 30-year deadline can absorb
more risk in their portfolio, than an older investor who is set to retire in five years.
Determining the level of risk that you are comfortable with will also determine what kind of investment vehicles you choose to put into your portfolio. Investors who are willing to accept risk may have a portfolio that is heavily weighted with stocks. Where as an investor that is not as risk tolerant may have a portfolio heavily weighted with Index Funds and Bonds. Typical investment theory states that younger investors should hold more stocks and more risk in their portfolio. The theory believes that stocks rise over time, so younger investors have time on their side for stock values to increase; and that even with big risk in the portfolio, should the market fall drastically or the economy hit a recession, over time losses will be recouped and turned into gains.
Keep in mind if you’re young and not a risk taker that is okay, your plan should fit you. Also, you can always update your plan in the future.
5. Decide What to Invest In
Now that you know where you are starting from, what the destination is, your limitations and deadlines, how much you plan to invest, and your risk tolerance, it’s time to decide what you plan to invest in.
All of the answers to the previous questions should make this decision easier. Stocks are usually deemed as risky investments, whereas Index Funds, Mutual Funds, and Bonds are considered safer investments.
Something to keep in mind is that you don’t have to go all-or none with any investment vehicle. You can create a mix of investments with safer investments making up a larger portion of the portfolio or vice versa.
Including guidelines on the type investments you plan to make helps as well. Maybe you want to invest in companies that only pay dividends or avoid bonds that offer yields below a certain number. Including investment guidelines will help an investor avoid making lousy investment choices.
6. How Often Will You Check Your Plan?
Checking your plan regularly, whether it be every quarter, twice a year, or every year allows you to monitor your progress. Are you investing more than you need to? Are you not investing enough? Has the fundamentals of one or several of your investments changed? Is it time to get less aggressive and more conservative? You will only know the answers to these questions by checking on your plan.
Investing, even when you are in it for the long term isn’t a set-it and forget-it exercise, it requires monitoring and updating. On the other hand, it doesn’t require an investor to check his or her portfolio every hour of every day. Setting it and forgetting it allows bad investments to become terrible investments. Watching a portfolio rise and fall every day causes unneeded anxiety.
It is important to check your plan regularly and update the plan when you’ve experienced any life changing events, such a promotion, a lay-off, a move, a house purchase, a marriage, a baby, etcetera. The investment plan that you created when you were single in an apartment should be updated if you're now married with a new home.
If you can tackle the seven assignments above you can create an investment plan. If you’re investing without a plan, create one as soon as possible. Investing blind is not a wise
strategy. Something to be conscious of is that your final goal, deadline, and risk tolerance should all work together for you. When you check in on your plan and investments, make adjustments according to your goals, deadlines, and risk tolerance.
. . .
Now that you understand how to create your investment plan we will help you understand three strategies you can apply to your plan. In this issue and the following two issues we will
discuss the growth, income, and safety investment strategies.