Investment Planning: What It Is, Purpose, And How To Create
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Most investors let emotions drive their decisions. Once a loss occurs, they get demotivated easily and look for a way out. Think about Warren Buffet; if he had left the stock market before turning 60, he would have always considered it the wrong investment line.
However, he didn't, and the right planning helped him attain excellent results. Investment planning is fundamental for the success of your investment portfolio; you must be sure about every step you take and its possible consequences.
Are you looking to begin your investment journey? Then, this blog is a must-read for you. We shall talk about investment planning and how you can succeed by creating an investment plan.
We have Ezekiel Chew with us to share his take on the subject; he is a renowned investing mentor and has helped thousands of investors turn into full-time traders. His knowledge has been the key to the success of multiple financial institutions, and we are lucky to have him on board with us. Let's go!
What is Investment Planning
Investment planning refers to creating an investment plan that helps you achieve your financial goals. Every investor enters the investing world with different expectations; some might be rooting for fixed returns to add to their monthly income, while others would like to invest the income and save for retirement.
For the former group, higher investment in bonds and fixed-return funds would be a better option, while the latter would be better off by investing in a retirement plan. An investment plan provides investors with the strategies and tactics to achieve their financial goals. Per our example, investors with an investment plan would have already diversified their investments, helping them move closer to their investment goals.
On the contrary, investors with no plan are often left at the mercy of lucky flukes; their decisions are emotional, and they are at a higher risk of losing their investment.
Financial Goals Explained
While discussing an investment plan, it is hard to ignore financial goals, as they form the basis for our strategies. They provide a benchmark for the investors to judge their portfolios and help them improve their asset allocation. Investing involves risk, and there is no strategy to end it; however, we can reduce it by planning our financial goals correctly. Below we talk about four financial goals that are usually shared amongst investors.
- Financial stability: every economy experiences yearly inflation; for some countries, the rates can be soaring high, meaning the money doesn't hold its actual value. Hence, some investors would like to invest to stay financially stable and counter inflation.
- Bread and Butter: 75% of investors in the NYSE aren't actively involved in trading. They look at it as a passive income; however, the other 25% are actively engaged in their day-to-day household expenses. The group uses intraday trading to gain quick profits.
- Long-term gains: The 75% of sleeping investors are usually in the market to benefit in the long run. They opt for low-trading high potential shares and wait for them to break the charts.
- Tax savings: If you are a high-end professional, you might pay a significant annual tax. A financial advisor shall advise you to invest in different tax-saving investments; a government provides tax leverages for investors to promote investment in an economy.
Purpose of Investing
Financial planning is a fundamental tool to increase your investments, without which it'll be challenging to make significant profits. The purpose of investment helps you identify the motivation behind your investment.
An investor might step into the stock market for the sake of long-term gains to fund their children's college education. In comparison, others might begin their investing journey for a high-end tour around the world or stop their wealth from eroding in banks.
Inflation in the US is at an all-time high, and people are looking for ways to save the actual value of their income. Investing acts as a counter to inflation; it not only provides cover against rising prices, but a possible rise can also help you fund other luxuries.
Balancing Risk Tolerance and Time Horizon
Risk tolerance refers to your capacity to bear losses; some investors set out investing at an early age; for these investors, the investment principal is usually small, and they are willing to invest in high-risk-reward securities.
They have an increased risk tolerance and can afford to bet a significant proportion of their investment to achieve great results. On the other hand, some investors opt for investing opportunities later in their career when they are closing retirement.
These investors are willing to put most of their life savings to attain fixed returns yearly to fund their after-retirement expenses. Hence, they won't have a risk tolerance and will usually avoid going for high-risk securities. As a new investor, your first goal should be identifying how much risk you are willing to take. You should be clear on the amount you can afford to lose for possible benefits in the future.
The investment horizon plays a fundamental part in determining the results of your investments. An advanced-tech company in its early phase would usually have fluctuations in its share prices; any negative news would significantly impact the share price and may cause it to fall.
However, as the company spends time and grows its customer base, its profitability will improve, leading to a higher share price. The share price for several years may rise, and early investors can have great results.
The investment horizon refers to the lifespan of an investment or the time after which you can start withdrawing your returns. Every investor has a different investment horizon; hence, the profitability derived from their portfolio would vary. The investment horizon goes hand in hand with your risk tolerance.
An investor must be sure about both aspects before they invest their savings. A certified financial planner can help you determine risk tolerance and your investment horizon; however, they aren't a necessity by no means, and if you understand the subject, you can fix them yourself.
Investment Planning and Advisory Services
We have always been DIY supporters, and various techniques can help you succeed as a trader; however, once we talk about large investments with little investment information, a little mistake can come in costly. It is due to a lack of experience and emotional decisions. Once you see constant losses in your portfolio, it will tempt you to exit the trade as soon as possible.
However, emotional decisions are often not backed by indicators and can be costly in the wrong run. Investors may enter a trade due to the fear of missing out, and once the share declines, they end up losing a significant proportion of their investments.
Financial services and advisory are necessary for your long-term success in the investment world. The financial advisors are well versed with all techniques to succeed in investing markets and bring great results to your financial life.
Nonetheless, you don't need to opt for expensive consultation sessions with financial advisors to create effective investment plans. Instead, you can opt for a brokerage offering free advisory services. Usually, brokerages allow their users to communicate with advisors on short notice, and they can come in handy in earning profit. They shall help you set up your trading account before you start investing.
Savings and Financial Planning
Savings are often seen as an alternative to investing; investors believe they can either invest their money in an account and see it rise or fall or leave it in their bank account and use it when needed. Savings are an excellent way to avoid over-expenditure; it allows you to save sufficient funds for needy times or after retirement.
Nonetheless, saved funds don't retain their value forever; inflation plays a significant part in undermining the value of your funds in the bank, and once you withdraw them after years, their real value won't be the same as the time you save them. Hence, it is vital to create a financial plan that provides heed to savings without over-mining its importance.
Financial planning involves diversifying your assets into multiple channels to create positive returns for the future. It can have a proportion of your investment going into savings, bonds, crypto, and the stock market. However, education about the market should never be undermined; fear and greed are two common emotions that will lead to losses for you. Hence, you must use indicators and technical analysis to make informed decisions that can help you sustain your profitability in the long run.
How to Create a Solid Investment Plan
We have talked a fair deal about an investment plan, and it is the right time to discuss the practical work. The first step in creating an investment plan is to start by clarifying your financial objectives. You must decide the motivation behind your investment and understand the ideal outcome of your investment. The next step is to analyze your risk tolerance and time horizon.
Ideally, no investor would like to lose a penny of their investment, and they would only want it to go in the upward direction. The best choice for it would be to invest in treasury bonds that are inflation controlled.
However, the return from TIPS is often low, and some investors may look for better results. Hence, they would have to take a higher risk; you should analyze the investment you could afford to lose; thus, only the proportion should go into high-risk securities.
Similarly, most investments are planned for future use; you might need them later in life. Hence, it is vital to identify when to withdraw from the asset and plan your asset allocation likewise. Real estate often has slow results, but most properties appreciate, and risk chances are low.
Next, you should use your financial goals, risk tolerance, and time horizon to find suitable securities. New investors will often be confused about finding the appropriate investment streams and may struggle for months before finding the right match. Therefore, you should try to use your brokerage's financial planning services to learn about the most profitable securities and the right investment strategies.
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Ezekiel Chew's teaching method is founded on the principle of return on investment, which states that if you invest $1, you will gain $3. It's not about zany strategies or elaborate procedures. Professional traders and financial organizations use his authorized system. He is the driving force behind the growth of various companies, including DBP, the Philippines' second-largest state-owned corporation.
Due to his strategy's effectiveness, many full-time traders have joined the program with little to no prior trading experience and emerged successful.
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Conclusion: Investment Planning
Investment planning involves identifying your financial goals and distributing your investments to achieve them. It is fundamental for an investor's success; it provides you with a blueprint to follow for your investment decision.
The plan shall help you invest in relevant securities that can reduce risks and bring great returns. The lack of a financial plan makes investing similar to gambling, and there is a greater probability of failure than success. You may need the help of a financial advisor to ease the process.
The first step of successful investments is gaining the proper education. You must use the available resources to their full extent to seek knowledge about investments, securities, and the best strategies.; they will help you succeed as a trader and achieve your long-term goals.
Investment Planning FAQs
What are the steps of investment planning?
We have discussed the step earlier in the blog; they can be summarized as follows:
- Find the purpose of investment and financial objectives
- Determine your risk tolerance and time horizon
- Sort securities fitting your criteria
- invest wisely using diversification
- Rebalance your portfolio after every interval
Why is Investment Planning Important?
Investment planning is essential for every investor; it can help you achieve your financial goals without taking additional risks. Financial planning allows you to make the most of investments by diversification. It will enable you to spread your investment in the right proportions in every stream to enhance your results.
