How to Setup an Investment Plan

On Wednesday I posted an article on generic planning. Today we’re going to take the next step and put it into practice creating an investment plan. Investment plans are the single most important document you can have related to your financial future. They outline the path you take throughout your financial life.

Starting Point for an Investment Plan

The best starting point in this discussion is on goals. To state things simply everyone has the same ultimate goal. Unless you believe you will die young, each and every one of you has a goal of retirement. Don’t get me wrong, that goal can take many personal forms: Extreme Early Retirement, Early Retirement, Retirement in an Airstream, retirement abroad, or your company lets you go because your health has deteriorated so far that you can now longer perform (forced retirement). In any case your retirement is inevitable, so it should always be your end goal. Getting to the goal requires two more sub goals, employment independent finances and getting out of debt. Everything else is personal about the plan, so from these three (for purposes of illustration) we will build a hypothetical plan.

The How of Setting Milestones

So starting with those three end goals you need to determine how you are going to go about meeting those goals (whom). What are you going to do? When and how are you going to do it? In general it starts with saving or debt payoff milestones (unless of course you have a rich relative you expect to inherit from, we don’t judge here at Full Time Finance). Remember we talked originally about making sure milestones are attainable, thus I recommend against setting the milestone by something that moves around outside your control like Net Worth. Savings milestones are a good start. Beyond a year you might want to set milestones for earnings on your investments. If you average over a 5 year period, then the risks of a global recession outside your control having more influence than your choices are much reduced. Finally, you probably want to set milestones for large purchases of some sort to avoid going into debt as we mentioned before. How are you going to obtain the down payment for a house, payment for a car, etc by the purchase date. In every case you’ll notice I say by when I will do them. This is part of holding yourself accountable.

How to Reach those Milestones and Goals

Which brings us to the how. A good plan starts with an understanding of your current situation. I’ve written in the past about budgets and tips to increase savings. Those tips are potentially the how for a savings goal. We’ve written about investment choices which contain tips on how to invest your finances. Take those items and determine the specific steps you will take and determine based on past performance and others situations whether it is likely you will reach your goals. Adjust up or down your goals based on the results of what you find. Keep in mind those milestones that would cause debt like purchasing a house and account for them to ensure you have the right liquidity at the time of purchase.

Adding in Risk Tolerance and Contingency Planning

Now step back. Look at the plan and evaluate what would you do if something does not go your way. Say the stock market crashes 50%, will you lose your cool and sell everything? If you lose your job, will you be able to support the house you plan to buy? Define your risk tolerance to these situations and adjust your plan to levels you are comfortable with so you won’t do something stupid in down moments. Then define contingency plans for everything else. If I lose my job I have a side hustle to fall back on, an emergency account, savings, or for the younger folks in the audience (heaven forbid if my kids are reading this) the bank of mom and dad. The point is you want a plan that accounts for things going incorrectly, because they will. Something robust enough that you won’t deviate far from the plan in off times, but allows you to adjust to those negative surprises life inevitably throws.

Put the Investment Plan in Writing

The final step here now that you’ve defined Who, What, Where, When, and How is to put it in writing. No, you don’t have to share it with the world. However, putting it in writing will increase your likelihood of sticking to it as the years pass. You’ll also want to regularly review your progress and adjust your plans as new opportunities present themselves. Failure to plan is Failure to Succeed. Why not start your path to success today by creating a plan.

Do you have an Investment Plan? Why or why not? If not will you create one after reading this?