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5 Steps To Make An Investment Plan

Make An Investment Plan By Asking 5 Questions

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How to Make an Investment Plan

A good investment plan includes a lot of common sense.

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To make a solid investment plan ask yourself the right questions, and patiently work through the answers. Build an investment plan based on answers to the five questions below, and you'll be sure to make good choices.

1. What Is The Purpose Of Your Investments? An Investment Plan Needs A Main Purpose

Investments must be chosen with a main goal in mind: safety, income or growth. The first thing you need to decide is which of those three characteristics is most important. Do you need current income, growth so the investments can provide income later, or is safety your top priority?

2. When Will You Need To Use The Money? An Investment Plan Needs A Time Frame

Establishing a time frame you can stick with is of the utmost importance. If you need the money to buy a car in a year or two you will create a different investment plan than if you are putting money into a 401(k) plan on a monthly basis and won't need to use the funds for fifteen years or so.

In the first case, your primary concern is what the account will be worth in a year. In the second case, it is irrelevant what the account is worth in a year; of greater importance is positioning the account for growth so it is worth more fifteen years down the road.

3. Do You Understand Investment Risk? An Investment Plan Needs To Account For The Level Of Risk You Are Comfortable Taking

Some investments entail what I call a level five investment risk; the risk that you can lose all your money. These investments are too risky for most people.

One easy way to reduce investment risk is to diversify. By doing so you may still experience large swings in investment value, but you can eliminate the risk of a complete loss.

4. How Much Money Do You Have To Invest? Your Investment Plan Needs To Specify How Much You Will Invest, and How Often

Many investment choices have minimum investment amounts, so before you can lay out a solid investment plan you have to decide how much you can invest. Do you have a lump sum, or are you able to make regular monthly contributions?

Some index mutual funds allow you to open an account with as little as $3,000 and then set up an automatic investment plan starting with as little as $50 a month which would transfer funds from your checking account to your investment account.

If you have a larger sum to invest, obviously more options are available to you. In that case you'll want to use a variety of investments, so you can minimize the risk of choosing just one.

5. Have You Made A List Of Available Investment Choices? You Can't Create A Good Investment Plan Until You Understand The Choices Available

Too many people buy the first investment product presented to them. Better to lay out a thorough list of all the choices that meet your stated goal. Then take the time to understand the pros and cons of each. Next, narrow your final investment choices down to a few that you feel confident about.

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