Creating an investing plan is arguably the most important step in investing. Your plan is the road map which will assist you in achieving your long term financial goals and aspirations.
The old adage, “if you fail to plan, you plan to fail,” relates 100% to successful investing. If you haven't created a plan or don't know how, here are the basic steps you need to take:
- Determine your time horizon (the amount of time you can sit on your investments) and write it down. You'll use your time horizon to choose which investments are most attractive to you. It also helps a ton when deciding between small, mid, and large cap stocks because you have already devised your own investment strategy.
- Gauge your level of risk tolerance. Some investors like to gamble more than others. Determining your risk tolerance early on will save you any unexpected moments of pain if followed correctly.
- Let your age play a role too. The younger you are, the easier it is to rebound from losses. This part of the equation is vital for baby boomers. DO NOT INVEST YOUR RETIREMENT IN ANYTHING BUT YOUR RETIREMENT. Baby Boomers want low risk, capital preservation stocks and/or funds. Remember: you can take out a loan on a car, education, house, or vacation, but cannot take out loans for retirement.
- Add the proper investments that agree with your investment plan. There's no point in devising a solid investing plan if you plan to focus your time and efforts elsewhere. Discipline is probably the most important aspect of investing. Learn it early on, and repeat it often.
- Balance your portfolio at least annually so it constantly reflects your investment plan. Always stay on top of your investments unless you rather pay someone else to do it for you.
Define your investing profile: This is the breakdown of your investment type. To give you an idea, here's my investment profile. Remember that I'm a college student, so you'll have to devise your own plan based on your age, level of risk tolerance, and time horizon.
- 70% Domestic Stock investment
- 15% Foreign Stock investment
- 15% bonds investment
- 0% Short Term cash (I have some cash in high yielding online savings accounts like Emigrant Direct)
Cash carries low risk because of it's face value and liquidity. Speculative investments carry high risk because investors “speculate” on the future of an investment without effectively analyzing data or similar resources.
Need to find out your risk profile? It's simple. You're either risk-adverse or risk tasking, but your time horizon ultimately determines your risk aversion.
Time Horizon < 30+ years
Goal = Aggressive Growth
- small and mid cap growth stocks
- mid cap growth and value stocks
- a few large cap growth stocks
Time Horizon < 20 years
Goal = Growth
- small cap growth and value
- mid cap growth
- large cap value and growth
Time Horizon < 10 years
Goal = Conservative Growth
- mid cap value and growth
- large cap value and growth
Time Horizon < 5 years
Goal = Capital Preservation
- mid cap value
- large cap value
- short term cash
Follow these steps and you'll be well on your way to financial success. Just remember: Plan your moves first, then Execute them.
What's your investment strategy?