For some investors, especially those who are new to the game or have not gotten quite comfortable with it yet, the idea of ‘Investment Planning’ can be mysterious, confusing, and even intimidating. I’ve gone out of my way to make this website as simple and clear as possible, so with that in mind I’m going to explain investment planning by breaking it down into 5 separate and easy-to-follow steps.
This is not meant to be a thorough and comprehensive ‘how to’ guide for investment planning. It’s only designed to acquaint you with the basic principles, so that you can do further study if you find your current efforts lacking. If you notice that you are missing one or more of the steps in your own investing process, I recommend that you address it right away because it could be costing you serious money.
Step 1. Know who you are. Investing is a contact sport. People get hurt. You’re competing against professional players who have many advantages. They have size (big wallets), speed (fast computers), and knowledge (small armies of mathematicians and physicists). They have expert networks and high-level corporate connections. And they play for keeps. If you decide that you can beat these players at their own game because you think you’re pretty smart, then you’ve already lost the game. You need to do a gut check, and ask yourself how far you’re willing to go in order to get what you want out of your investments. And unless you’re willing to spend several hours each day on your investments, you should probably stick to a traditional plan that requires a small amount of time to maintain after you set it up.
Step 2. Develop your investment philosophy, goals, and expectations. Your philosophy will guide you through the process of building your actual portfolio. It will contain your core beliefs and it will help you to prioritize your efforts. Your goals will give you something tangible to work towards, and you’ll set benchmarks for measuring how well you’re progressing. Your expectations are different from your goals. Goals are targets, and expectations are the means and methods for hitting those targets.
Step 3. Calculate your essential numbers. This is actually the least complicated of the 5 steps. The first and most important number is your MAR – or Minimum Acceptable Return. This is the rate of return that your investments will have to produce in order for you to meet your stated goals and objectives. You get this number by reverse engineering. Start with the total amount of money you’ll need when you begin to draw down your funds. Deduct what you have now, and what you will be putting in during the accumulation phase of your investing period. The deficit is your total need. From that you will calculate the rate of return required to make up for the deficit.
Step 4. Develop your game plan. This includes your rules, checklists, benchmarks, alerts and contingency plans. The more effort you put into automating your investments, the easier it will be to make good decisions under pressure. Rules will be the framework of your discipline regime. Alerts will be your prompts for making trades. Contingency plans will enable you to deal effectively with unexpected events, instead of reacting in an atmosphere of anxiety or panic.
Step 5. Build your portfolio. The majority of amateur investors skip the first 4 steps and jump right to this one. Don’t make that mistake. When you finally start to work on your portfolio, do it in a way that produces your MAR with the least amount of risk to your principal. There is no reason to take more risk than necessary. If your MAR is 10% or less, you can build a traditional portfolio using low cost index funds. If your MAR is greater than 10%, you’re going to have to make some tough choices. When a ship is too tall to fit under a bridge, the captain only has two choices. Raise the bridge or lower the water. You can raise the bridge by saving more, or taking more risk with your investments to produce a higher rate of return. Or you can lower the water by reducing your spending, or working longer.
These are the 5 essential steps for setting up an investment plan that will guide you through the entire process from start to finish. If you follow this structure, you will have a framework that is comprehensive and flexible enough to get you through any market environment that you may encounter. The more time and effort you put into your plan, the better off you’ll be in the long run. A thorough plan will greatly reduce the tendency to make emotional decisions about your investments.
If you would like further information on any of these 5 steps, you can send a request to us at info@zeninvestor.org
Thank you for the kind words. Hope you get some practical use from it.