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?
- To determine which is most important, read Investment Basics: Safety, Income or Growth.
- If you are 55 or older, before you create an investment plan, your need to make a retirement income plan. Your retirement income plan will become the foundation you build your investment plan upon.
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.
- To see how much investment returns can vary over short time frames verses long ones see Rolling Index Returns.
- If you don't have much time, see 5 Steps To Take Within 5 Years of Retirement.
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.
- Gain an understanding of investment risk and expected returns in How To Classify Investment Risk On A Scale of 1 to 5.
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.
- If you have a lump sum to invest, and you're trying to figure out how much to put in what type of investment, see How Much Of My Money Should Be in Stocks vs. Bonds.
- If you're planning for retirement and you're not sure how much to invest, walk through the steps in 4 Steps To Determine How Much To Retire.
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.
- Start your list with choices from Best Retirement Investments and 9 Ways To Generate Retirement Income. But before you buy anything, be sure to read What is a Good Investment, as it will help you narrow your choices.
- If you are comfortable with risk, then consider adding some choices from High Yield Investments