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How to Develop an Investment Plan

How-To Build a plan that fits your unique needs and circumstances

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Know Where You Are

Create a Financial Inventory and Budget

Your plan should reflect your financial condition, financial objectives, and risk tolerance.

Know what you have, what you owe, what you save, and how much you could save.

  • What You Have: Think checking, savings, and investment accounts, retirement accounts, and equity in your home.
  • What You Owe: Think student loans, credit card debt, mortgages, and car loans.
  • How Much You Save: Make a budget to see how much you save, and could save.  Our Figure out a Budget in 3 Minutes helps you see how much of your spending is “fixed,” how much is discretionary, how much you save, and how much more you could save if you reduced your discretionary spending.

Set Your Objectives and Priorities

People Have Different Objectives, Priorities, and Timetables

List your objectives.  For each list:

  • The amount needed (your “savings goal”)
  • The time to reach that goal (your “investment horizon”)
  • Priority, based on whether it’s a “need” or “want” and on the cost of failing to save enough in the time set (the “shortfall cost”).

AN EXAMPLE, which likely differs from your objectives and priorities:

OBJECTIVE

GOAL

HORIZON

PRIORITY

Emergency Fund

$4,000

5 months

1

Retirement

$500,000

25 years

4

College Tuition

$50,000

12 years

5

House Down Payment

$40,000

5 years

6

Boat

$10,000

5 years

8

High Interest Debt

$8,000

4 years

2

Moderate Interest Debt

$20,000

8 years

3

Determine Your Risk Tolerance

Determine Your Willingness and Ability to Bear Risk

Your savings grow faster, the higher the return on your investments. But higher returns come at the cost of greater risk.

Savings in 10 Years, if  You Save $1,000 a Year

Return on Investments

Savings in 10 Years

0%

$10,000

2%

$10,950

4%

$12,000

6%

$13,200

8%

$14,500

 

Stocks have higher expected returns than bonds, but are riskier: 

So you need to determine how much risk you are willing and able to take.

Willingness to Take Risk: How comfortable you are when the value of your investments fluctuate.  To estimate your willingness to take risk:

  1. When considering stocks are you more
    1. Concerned about possible large losses
    2. Attracted by the possibility of large gains
  2. If you were invested in stocks during the financial crisis, did you
    1. Regret investing in stocks as their values fell
    2. Were willing to “wait it out”
  3. In the last financial crisis, did you
    1. Sell stocks
    2. Hold your stocks 
    3. Buy stocks

The first answers indicate little willingness to take risk.   The second indicate a greater willingness.  The last answer to question 3 indicates a significant willingness to take risk.

Ability to Take Risk: How would you be affected, or how might you respond, if things in the financial markets “go badly.”  Factors that increase your ability to take risk:

  1. High net worth – what you own less what you owe – relative to your high-priority savings goals.  
  2. Secure employment and income that’s likely to rise. 
  3. Budget flexibility–the ability to cut spending and increase saving to offset investment loses.
  4. A long investment horizon or ability to extend that horizon, which provides more time, should “things go badly,” to work more and save more. 

 Balancing Willingness and Ability

Ability is more important than willingness.  But given your ability to bear risk, are you willing to bear risk to reach specific objectives?

  1. If “things go badly, ”are you are willing to save more, work longer, or delay achieving a high-priority objective?
  2. If “things go badly, ”are you are willing to forego achieving a low-priority objective?

Develop an Investment Plan

Based on Your Willingness and Ability to Bear Risk

For each saving objective, indicate your willingness and ability to bear risk.  This could be as simple as “high,” “moderate,” or “low” or on a numeric scale from one to ten.

OBJECTIVE

GOAL

HORIZON

PRIORITY

RISK

Emergency Fund

$4,000

5 months

1

Low

Retirement

$500,000

25 years

4

High

College Tuition

$50,000

12 years

5

Moderate

House Down Payment

$40,000

5 years

6

Moderate

Boat

$5,000

5 years

8

High

 
High Interest Debt

$8,000

4 years

2

Moderate Interest Debt

$20,000

8 years

3

 

Assign assets for each objective based on your willingness and ability to take risk – from “risky” assets like aggressive stock funds to low risk investments such as short term bonds or FDIC-insured bank savings accounts.

Does your plan deliver? For each objective, add how much you’ve saved and how much each month you save or use to pay down debt.

OBJECTIVE

GOAL

HORIZON

PRIORITY

SAVING

SAVED

RISK

Emergency Fund

$4,000

5 months

1

$200

$3,000

Low

Retirement

$500,000

25 years

4

$400

$35,000

High

College Tuition

$50,000

12 years

5

$200

$10,000

Moderate

House Down Payment

$40,000

5 years

6

$200

$15,000

Moderate

Boat

$5,000

5 years

8

0

High

 
High Interest Debt

$8,000

4 years

2

$160

Moderate Interest Debt

$20,000

8 years

3

$200

The key to a saving and investment plan is to maintain a certain level of saving.  If you reach an objective or pay down a debt, shift that saving to your next priority item.  If things go as expected, will you achieve all of your objectives?  If things “go badly,” could make the necessary adjustments?  If not, should you increase how much you save or revise your goals and priorities?

You can test out a basic plan, with pre-set asset allocations, at Build a Better Tomorrow.

This How-to developed by BSAS

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