One of the most important things to do when investing, is to create a great investment plan and to stick to it. An investment plan is your roadmap to success. It helps you make the best strategic choices and prevents you from making costly decisions based on emotions. Emotions can sometimes get in the way of your financial goals, but a plan keeps you on track!
How to create a great investment plan
With an investment plan, you make decisions based on logic. You’ll find that investing suddenly becomes much simpler. While this sounds great, creating an investment plan can be quite challenging. This article is going to give you four key tips to help you start building a solid investment plan.
Key tip 1: Decide to do it yourself or have it managed for you
When you’re ready to invest, you’ll face a key choice: do you invest yourself or let an external party manage it for you? Each option has pros and cons. Self-investing gives you complete control over your portfolio.
It’s often cheaper than managed investing, but it can get more expensive if you frequently buy and sell. Successful self-investing requires a lot of time and expertise. Not every investor outperforms a global index.
In managed investing, you essentially outsource the investing process. You could entrust your money to a wealth manager or invest in passive index funds. Passive ETFs are generally low-cost and require minimal time commitment. The long-term returns can be very solid.
For many investors, a passive index tracker (in the form of an ETF) is an excellent choice. You could also entrust your money to a wealth manager, though this often involves relatively high fees. However, with good research, you can find quality managers. The advantage is that you don’t have to spend time researching stocks. You outsource this and don’t have to worry about it.
Managed investing is generally less risky than self-investing because investment experts are better able to assess the risks and returns of financial products, making more responsible choices than individual investors.
Deciding whether you want to be an active or passive investor should definitely be part of your plan.
Some wealth managers also use the Life-Cycle method, so if you’re self-investing, this is something to consider.
Key tip 2: determine your investment horizon
Before you dive into buying stocks, it’s crucial to know how long you plan to invest. If you intend to use your funds within a year or two, you’ll approach investing differently than if you have a horizon of several decades.
If you’re only investing for a few years, it’s wise to take relatively less risk, as you’ll have less time to recover potential losses. Investing involves risk, and you may lose value on your initial investment. Risk often, but not always, goes hand in hand with returns
If you’re unsure which horizon suits you best, it may help to go through the next two tips and revisit your investment horizon afterward. This will likely give you a clearer picture of your preferences.It’s also wise to consider the power of compound interest. The longer you invest, the higher your potential returns.
As your investment horizon approaches its end date, you might choose to reduce your risk by investing in less risky assets. This approach, known as the Life-Cycle method, ensures that your target amount is more secure when you reach your investment horizon. If a correction or crash occurs in the final years, you’ll feel less impact if you’ve invested more in lower-risk assets like gold, other precious metals, or bonds rather than stocks.
Crypto, on the other hand, carries even higher risk (and potentially higher returns), so keep this in mind. Risk levels vary across asset classes; for instance, growth stocks are generally riskier than value stocks, which often pay dividends.
Key tip 3: Decide how much risk you’re willing to take
Knowing the level of risk you’re comfortable with is essential. If you’re unclear about this, you may end up making costly mistakes. Risk levels are tied to your investment horizon. If you prefer to take minimal risk, it’s wise to choose a longer horizon.
High-risk investments are often associated with shorter horizons. Prices are challenging to predict over the short term (less than a couple of years). Your personal preferences are also essential. If you’re likely to lose sleep over volatility or panic at falling prices, a low-risk investment strategy may be a better option for you.
Investors with a specific goal in mind, such as “I’m investing to buy a Porsche in 20 years,” tend to reduce risk as the target date nears. They may already be shopping around and wouldn’t want to settle for less. Include this in your investment plan.
If you don’t have a specific goal, it may be harder to stick to your plan. Set goals for yourself, like “$500 extra income from dividends, every month”.
If you’re investing for retirement, depending on your current age, you may still have a long time to go. In that case, you can afford to take more risks now, as you’ll have time to recover from any possible future setbacks.
Key tip 4: Determine your investment strategy
Creating an investment strategy is crucial for those who choose self-investing. For those opting for managed investing, strategy often aligns with the answers to specific questions the wealth manager will ask you.
Once you’ve decided on your investment horizon and risk profile, you can start shaping your plan. Consider the analysis method (fundamental or technical) and the financial products you want to invest in (stocks, crypto, bonds, etc.).
If you prefer low-risk investing, it’s common to divide assets between stocks and bonds. Deciding how you’ll do your homework is also important. What criteria will you use to select and evaluate companies?
Warren Buffett’s investment strategy, followed by many other investors, involves selecting companies based on their business model, competitive advantages, management, and valuation. These criteria can seem vague and intimidating, but they’re manageable in practice. You could easily include this strategy in your investment plan.
Conclusion
To create an investment plan, first outline the basics. How long will you invest, and how much risk are you willing to take? Also, consider how much you want to invest (every month) and how much cash you want to keep on hand in case of job loss or unexpected expenses.
Your personal situation plays a large role here, and it can vary from person to person.
Then decide whether you’ll invest yourself or choose passive/managed investing. Finally, strategy is an important factor in the investment plan.
When choosing an investment strategy, you could take a look at popular investors like Warren Buffett or Bill Ackman, who have proven strategies generating strong returns year after year. No need to reinvent the wheel. Copy like an artist.
Keep in mind that learning to invest takes time, and every investor makes mistakes. This is perfectly fine, as long as you don’t invest money you can’t afford to lose.
Save yourself some mistakes, lost returns, and stress by carefully planning your investment strategy and start investing confidently.
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