We all want to watch our investments grow and most of us understand that to make that happen, we need a flexible investment plan. Nevertheless, most of us lack a good plan – continue reading and learn how to create yours:
In this article I will teach you how to align your goals, constraints and risk appetite into a sound investment plan. You will learn to create the right flexible investment plan for you at a low cost.
As you will see in this article, it is important to understand how to align your financial planning to your life goals and financial objectives. As in any investment plan, flexibility must come together with discipline to follow the plan.
Flexible plan investments can be created and managed by yourself or by a third party like Prudential or Discovery. As long as costs are kept low you can be confident of consistent returns in the long run.
Long term investments depend on the right amount of diversification and discipline from the investor. More important than picking the right stocks or mutual funds, you need to be consistent, organized and disciplined.
Continue reading and I will show you that the secret to have a solid investment plan is to:
- Set realistic and actionable financial goals.
- Diversify across multiple asset classes and financial products.
- Keep costs low.
- Be flexible to re balance and re evaluate along the way.
1 – Understanding the difference between financial planning and investment planning
Before we start, it is important to highlight that a good flexible investment plan is not enough to reach financial freedom. Finding the best long term investments is only a part of your financial plan.
The key difference between financial planning and investment management is that financial plans involve more than just the investment part. To reach financial independence you must have a good investment plan but also consistent expending habits, under control debts, visibility of your credit card expenses, and liquidity in the form of an emergency fund.
2 – Setting your investment plan goal
A sound investment plan starts with a set of objectives. Most investment plan goals are straight forward as you can see on the examples below:
- saving for retirement
- preserving capital, or maintaining your net worth
- funding a pension plan
- meeting university spending requirements and tuition fees
If you have multiple goals, you can either group them in one investment plan or make a flexible investment plan for each of your financial goals.
I cannot stress enough the importance of setting clear investment goals before you start thinking where to put your money. I see many investors making a long term investment in stocks without properly defining their objectives first.
3 – Example of an investment plan goal
Let´s see an example of investment plan goal. Don´t focus on the figures, but on the investment plan goal template:
- Investment plan goal: Accumulate one million dollars, inflation adjusted.
- Initial capital deposit: $10,000.
- Time limit to reach financial goal: 40 years.
- Annual investment: $10,000, inflation adjusted.
- Required rate of return (RRR): 4% above inflation, taxes and fees.
Your personal investment plan goal might be totally different than this example, and it probably is. Nevertheless, make sure to include these five topics on your goal:
- A measurable financial goal.
- Your starting capital.
- A specific time frame.
- An reasonable periodic investment commitment.
- An achievable rate of return.
4 – Investment plan constraints
Once you have your goal set, it is time to think about your constraints. They can be varied and will change over time, so it is important that you revisit this list every year. Example of financial constraints are:
- Financial risk tolerance
- Time horizon
- Tax exposure
- Liquidity requirements
- Legal issues
5 – What is the role of asset allocation in investment planning?
A personal asset investment plan rate of return will depend mainly on what type of asset class you allocate your funds. In broad terms, you investment can be divided in three types o asset classes. Each class will have a different volatility as well as a different expected return:
- Cash has the lower volatility, but also the lowest expected return.
- Bonds will be something in between and stocks will give you the largest expected returns
- Equities or stocks will have the highest potential gain, but also the highest volatility
Your investment savings will be distributed across cash, bonds and stocks depending on your investment goals and time you have available.
If you start a 10 year savings plan, a good benchmark is to have 50% in stocks and 50% in bonds. As you get closer to the end of your investment target, your allocation should shift to an increase in bonds and cash in order to safeguard your returns and protect you against volatility.
Long term investment strategies can afford greater exposure to risk, and therefore will be more focused on stocks. Short term savings accounts in the other hand, will tend to be focused on low volatility and low returns.
Do not be fooled into jumping to something on the lines of the ‘best stock to invest for 5 years’. Set your goals on a specific and detailed manner. Reflect about your constraints and then define how you are going to allocate your money across cash, bonds and equities. Only then start thinking about what you are going to buy or not.
6 – Asset investment planning and financial risks
When developing your savings and investment plan, it is critical to select a combination of assets that will have the highest change of meeting your plans objective.
Several studies have shown that there is no such thing as a best thing to invest your money in. Your investment returns will depend from 80% to 90% on how you distribute your money across different asset classes.
7 – Risks of one size fits all investment plans
I have seen long term investments examples where the stock exposure is reduced as the person gets close to retiring. That is perfectly fine for if you are going to live from the proceedings of your investments.
But let´s consider the case of someone that has a strong retirement plan, and that will pass the investment portfolio to their descendants. In that case a low stock exposure late in life might prove to be a big mistake.
8 – Volatility – long term vs short term investment
When talking about long term savings, most people are worried about losing money. So they prefer to focus on a safe long term savings account.
Whenever there is a bull market and the media is full of talk on ‘how to invest savings’ and the ‘best way to invest savings’, then all risks are forgotten and people decide to enter on short term stock investments.
Soon enough the bear market comes, prices drop and investors run away from stocks, losing a lot of money in the process. That is the best way of buying high and selling low.
9 – Long term savings options and inflation
When choosing bonds vs savings account to save or invest, people are normally trying to protect themselves from the risks of the volatility of stock markets.
By doing so they are committing to small returns, which will result in two risks:
- If your flexi saving plan has minimal returns, it may not achieve your long term investment goal.
- As low interest rates become the new normal, your savings fund will not only fall below your investment goal, but it will loose to inflation.
Therefore, before you consider focusing your investments in bonds or on an investment savings account, make sure to account to your financial target and to the effects of inflation, taxes and fees.
10 – What is annual investment plan
For the purpose of personal finances, lets consider your commitment to invest every year as an annual investment plan definition.
To ensure the success of your financial plan, it is important to have the commitment to invest on a fixed schedule. Here the amount is less important than the habit and recurrence.
Your year savings plan should be consistent and achievable. I have found that the best way of doing it is to set a calendar day to invest your money, and to do so with a percentage of your net salary.
11 – How much of my savings should i invest
Stop asking yourself ‘should I save or invest?’. Any money your have extra should be saved and therefore invested towards your flexible investment plan.
Nevertheless, even the best saving plan will not be successful if you do not put enough money into it. Therefore it is critical that you set a minimum amount to your annual investment plan.
The best way to invest money long term is to commit a percentage of your net salary. The exact number may vary depending on your personal situation on a given year, but it should be around 5% to 20%.
12 – Conclusion
Be it a mid term investment or 10 year saving schemes, be sure to set a specific, measurable, achievable and time bond goal.
There is no such thing as a best equity saving fund. Have a flexible plan and focus on how you allocate your funds across different asset classes.
Your long term investment account is exactly that, long term. Once you commit to a plan, stick to it. Do not fall into the trap of buying high and selling low. Buy every month a little bit and profit from the market swings.
Medium risk investments can take you a long way. Re balance your portfolio every year and stick to your plan.
Remember that a savings account is most useful for an emergency fund. Your long term savings should be split between bonds and equities in order to beat inflation and reach your long term financial goals.
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About the author:
Hi, I am Leblon Blue. Mid-thirties senior manager on a large corporation. Happily married for seven years and waiting for my first kid. I have dedicated my past 15 years to build an engineering background and a stable career. After working in Europe, Scandinavia, and Latina America, I am now based in the Persian Gulf, where I manage the performance of a large corporation that operates in the region.