How To Create A Solid Investment Plan
What kind of investment plan or types of investments should the average person own?
For many avowed spenders, the concept of risking money and hoping that it grows for use in the future is very foreign. In fact, some people think that “investing” boils down to playing the blackjack tables in Vegas. But a lot of folks don’t realize that what they’ve been doing for years are actually already forms of investment.
One thing that I’ve done to get started with investing was to first determine what kind of risk profile I had (I’m moderately aggressive, by the way). Once you know what you’re comfortable with, you can decide on what kind of mix of stocks, bonds and other assets that you can stick with for the long haul, without flipping out during rocky market periods.
Some who’ve expressed concern over steep one day stock market drops have asked me what they should do during such volatile periods. Some wonder whether it’s a good time to buy and others wonder whether they should sell. The key is to have an investment plan that won’t make you wonder so much when the economic climate and markets are shifting.
Here are some tips on how I’ve handled my own investments.
7 Tips To Create An Investment Plan
#1 Do not react to the market. Be proactive instead.
Make your investment moves before any major market action takes place. It’s best to have a good plan on paper before executing it, and it’s best to execute it during a time when the market isn’t dancing around wildly. Get the answers to these questions before you invest and make it a part of your plan:
Replies to these questions can help point you to the right types of investments. Anticipate some possible market moves and know what you’ll do before something big happens!
#2 Take investment positions in your portfolio when the market is stable or depressed.
Whenever I build a position in my portfolio, I always try to do so when the market is level or weaker. I prefer not to buy during stronger or hotter periods and I try not to chase returns. That isn’t to say that buying while the market is going on strong is a bad thing or even a wrong move since momentum can certainly take you far. In the long run, it may not hurt you to buy during an upswing. But I tend to be a contrarian and I like capitalizing on weakness, where there could be more opportunity. Others may disagree with me but this is what I’m comfortable doing. You can certainly make money using different investing styles, and I’ve so far stuck with what’s worked for me.
#3 Decide where you’re going to put the money. Hint: KISS (as the saying goes: keep it simple and stupid). If you consider yourself a small investor (most of us do) who does their investing on the side, then there’s no point in spending hours upon hours hand-picking stocks and bonds to build your portfolio unless of course, you enjoy the process. Instead, determine your needs and find a mutual fund, or set of funds, that fits those needs.
#4 Create a core diversified portfolio.
Let’s elaborate further. Build a strong foundation for your investments by creating a diversified portfolio of your core holdings. You can do this by assembling your own portfolio by choosing mutual funds and ETFs across various conventional asset classes such as equities, bonds and cash. Figure out what types of asset classes you’d like represented and what percentages they should represent in your mix. Such a portfolio needs to be in line with your risk profile so you can sleep well and be assured you’re doing the right thing.
Tip: Settle on some good fund families with experienced managers and purchase shares in their funds. Key points to look for: low fees, consistent performance history, and a management company that is strong on service. Take note of the management style, tax ramifications, and actual securities in the funds you consider. I personally like Vanguard, but I’ve got a friend that swears by T. Rowe Price. You can also find index funds available through an online broker.
#5 Add some ooomph to your portfolio.
Maybe you need to try some hedging techniques. Maybe you need to develop a portfolio that includes alternative asset classes to add more diversification. This can be achieved by adding negatively correlated asset classes to your mix. You may need some expert help when trying this out, so research and learning are key when you’ve decided to go this route. You can start by reviewing material from educational investment sites to learn how to tackle investments beyond the standard equity/bond combinations.
#6 If you’d rather not create or self-manage your own portfolio, buy into a preassembled one. There’s quite a number of mutual funds out there that can be considered as “one stop shops”. The purpose of such funds is to try to take the guesswork out of selecting diversified investments by keeping strict allocations that in some cases, conform to targeted timelines (depending on the type of fund they are). Some examples are:
However by settling on such funds, you lose flexibility and control over your investments for by definition, the funds do their portfolio shifting on their own. So be aware of these caveats when buying into these funds; remember that you’re buying convenience and hiring someone else to worry about your allocations for you.
#7 Determine how much “extra” you have to invest. Do you have extra cash in your bank account or credit union? Do you have more money than you really need to keep on hand to cover emergencies? Take the excess and make an initial lump sum investment with an investment house or brokerage. Then, determine how much you can invest out of every paycheck. Even if it’s only $25 or $50 every couple of weeks, starting now will help you to get in the habit of putting money away regularly. As your income grows, increase the amount that you regularly sock away.
First Things First: Investment Ideas For The Everyday Investor
Now let’s go into some specifics. Aside from building your own investment portfolio, what are some investment moves you should be making today (if you haven’t already)? A lot of people have access to these types of investments through their employer or have the kind of goals that merit the use of certain investment accounts.
Get the 4-1-1 on your 401(k). Don’t overlook the obvious. If your employer offers any sort of match for 401(k) contributions, try your best to take full advantage of that benefit before looking to other investment options. To not do so is to let money slip away. Plus, because 401(k) contributions are made from pre-tax earnings, you reduce your taxable income by the amount you contribute. Would you rather invest your money for your future, or hand it over to Uncle Sam so that it can fund more swank parties at AIG?
If you decide to leave your employer, think of moving your 401(k) money to a rollover IRA, where you’ll have more control over your funds. Where to start? Check our list of best online brokers
with reasonable commission rates and great resources for investment learning.
Don’t forget the tax benefits of a good old IRA. You can further reduce your taxable income by putting your money into an IRA. The maximum IRA contribution for 2012 is $5,000 for people age 49 and younger and $6,000 for people age 50 and older.
Invest in your child’s future with a 529 account. Setting up and regularly contributing to a 529 college savings plan for your kids as quickly as they can be legally counted on a census will not only help to buffer the pain of tuition costs for you when they hit college age, but will also allow them to avoid at least some college debt, giving them a nice head start into a financially secure adulthood.
Buy a house. Do you own your home? If yes, you’re a real estate investor. Your home is a valuable asset and is subject to all sorts of market risk, as Americans who face foreclosure can attest. If you’re not already a homeowner, then consider snapping up a wonderful home when markets are weaker. Live in your home for as long as you can, make improvements as needed, and don’t touch any equity that you build (Repeat after me: My home is not an ATM machine.). When retirement rolls around, you should be able to sell your little slice of paradise and buy a new slice of paradise in a tropical location for cash. Theoretically, of course.
When you’re ready to put your money to work, know that there are dozens of options for investment houses out there, and some even offer sign-up bonuses for new customers (check these online stock trading promotions for more information — and no, you need not be an active trader to receive a bonus). There’s nothing better than free money! Except, perhaps, knowing that you will be OK in your golden years, with or without Social Security.
With these ideas, you should be on your way to starting your own investment plan. The bottom line? Have that plan BEFORE you make your moves or dip your toes in the market so that once the market behaves like a wild beast, you’ll know how to ride it.
Created January 5, 2010. Updated April 30, 2012. Copyright © 2012 The Digerati Life. All Rights Reserved.