Investing is risky and rewarding at the same time. Investing is essential to your future financial plan and achieving your present financial goals.
If your employer offers a retirement benefit, you can navigate within the plan to manage your retirement objectives. Most employers' retirement plans provide tips to create and execute a sound investment plan for your future financial goals.
Suppose your employer doesn't offer a retirement benefit. Suppose you're self-employed, an independent contractor, or want to manage your employee retirement plan better. In that case, you will benefit from the best 6 tips for creating an investment plan for your long-term and short-term financial goals.
WHAT IS AN INVESTMENT PLAN?
According to Let's Make a Plan, "an investment plan is part of a comprehensive financial plan that maps out an investing strategy to help you meet your long and short-term goals, such as retirement or buying a house."
Why should you create an investment plan?
An investment plan will help you develop and stay focused on executing your plan for using your limited financial resources in a way that does not guarantee a positive outcome. An investment plan guides you to achieve your investing goals and shows how investing will aid in accomplishing your overall financial plans.
Tip #1 Investing Goals
What do you want to accomplish by investing? Why are you taking a risk with your money? What do you expect to gain by investing? Do you want to put your money in a savings account or purchase securities? What are you going to do with your earnings? How much do you want to invest each month or year? How much of your income do you want to invest?
Your investing goals should assist in achieving your general financial plans. If one of your financial goals is to save for a house, then one of your investing goals could be to contribute the interest earned from a 12-month certificate of deposit to a house fund. Another investing goal is to set up a retirement account with an online brokerage firm in the next 30 days.
If you are unfamiliar with setting goals, use this popular method.
TIP #2 Risk Tolerance
"Risk tolerance relates to the amount of market risk an investor can tolerate. In simple terms, it is how much you are willing to be unsure about (and how much money you're ready to spend on this unknown) in the face of possible gains" (thebalance.com)
Investing involves some risk, and select assets have more risk than others; however, investing is a risk worth taking for your future. It is necessary to know your risk tolerance. How much risk are you comfortable with when it comes to your money? How would you react to losing money?
Use this risk tolerance assessment from the University of Missouri.
Tip #3 Time Horizon
Your time horizon is how long you will keep an investment before selling. How long will you hold an asset to reach your investing goal? You need time and patience to experience a reward from investing.
How much time do you have until your investments mature?
Investing can be disappointing at times. It is easy to get caught up in checking your investments daily and reacting when your stocks fail to yield or stock prices drop—you sell before gaining a dividend.
Tip #4 Diversification
Diversification reduces some of the risks connected to investing. It is better to purchase shares from 10 different companies than ten shares from one company. Diversifying means you can spread your risk throughout several companies in your portfolio.
"Don't put all your money in one company."
Correlation measures how closely investments react to the exact circumstances in the market. For instance, when stocks have a high degree of correlation, they will respond the same way to changes in the market. You want to buy stocks from different companies spread throughout various industries.
Tip #5 Asset Allocation
Asset allocation involves dividing your investments among various assets, such as stocks, bonds, and cash. (investor.gov)
Asset Allocation may modify your investment portfolio over time, depending on how long you hold an investment and your ability to tolerate risk. (investor.gov)
Consider your risk tolerance and time horizon when figuring out how to allocate your investments. There isn't a formula for how much you should have in stocks, bonds, or cash investments. For example, when creating your investment plan for retirement in your 20s, you have the time to bear more risk and have an investment portfolio of 60% stocks and 40% bonds; over time, the allocation of assets should change. For instance, when you reach your 60s, your investment portfolio changes to 60% bonds and 40% stocks.
Tip #6 Types of Investments
Your investing plan won't be complete without types of investments. The investments below are the most popular assets available. Here is a more comprehensive list of investments for every investor.
● Certificate of deposit (CD)
● Money Market
● High-Yield Savings
● Stocks/Equities
● Bonds/Debt Securities
● Mutual Funds
● Exchange-Traded Funds
An investment plan is crucial for individuals who are beginning to invest. It is your best guide for managing your investments.
My investing story began with a conversation with my grandfather and some vital information about social security. Social security will not be enough. The first step was to learn the language. I had little knowledge of investing. After understanding the basic terms and concepts of investing, I jumped in without a plan. I discovered only what was needed to achieve the goal of saving for retirement.
After obtaining the basic understanding, the next step should've been creating an investment plan. Today I consider myself an overly unapologetic organizer and planner, especially concerning money. The 6 tips will help you create an investment plan, which will assist in achieving your short-term and long-term investing goals and managing your assets.
