Six Essentials for Every Investment Plan

It’s easy to assume that investing decisions are based on rational, logical facts. But humans are emotional creatures, particularly when it comes to decisions about money. If markets are up, we tend to get excited and want to take more risks. If markets are down, we generally get scared and want to sell everything. One of the ways to remove emotion from our decision making is by having a solid investment plan.

Why do you need an investment plan?

It can be easy to jump straight into investing, but having a plan in place first is often a worthwhile use of your time and effort. Apart from helping us dial down our emotions when making decisions, an investment plan can also:

• Put a structure in place to help you make choices about your portfolio
• Provide a long-term perspective to help you assess market fluctuations
• Help you develop your own style of investing and reflect on your individual characteristics
• Help you document your growth as an investor
• Give you flexibility to add or remove parts of your portfolio over time.

Related reading: Investing for Young People: Shares, Bonds and Property

What should be included in your investment plan?

1.  Your investment goals and timeframes

It’s hard to write a plan without knowing what you want to achieve. Take the time to set clear, measurable investment goals, and include these as part of your investment plan. Everything else in your plan should be written with the intention to help you reach your goals, within your timeframes.

2.  Your return expectations

Write down what kind of return you expect from your investments. Are you looking for assets that will generate income for you, or are you more focused on long-term growth? What kind of percentage return are you expecting?

There’s no need to agonise over what specific investments to make at this stage, but having a good idea of your return expectations will give you a guide on what investments to consider.

3.  Exit prices

How will you decide when to sell an investment that goes up or down? Think about your profit target and your timeframe. If an investment delivers the returns you expected, will you sell it? Or will you hold it to see if it continues to rise?

Also, think about how much you’re willing to lose if an investment performs poorly. If the price falls below a certain point, will you sell out to limit your loss? Or will you hold it and wait to see if it recovers?

Keep in mind, the whole idea behind an exit price is that you stick to it. So investors who have the discipline to follow their entry and exit strategies might generally find they have more success.

4.  Asset allocation

Your investment plan should outline the mix of assets you’ll have in your portfolio. This is known as asset allocation, and the assets you choose should match your risk tolerance, goals, and timeframes.

For example, if you’re aiming for short-term income generation, the stocks in your portfolio should reflect this. Or if your objective is long-term growth, you might invest in stocks that may be currently undervalued or have the potential for growth.

5.  Portfolio monitoring and rebalancing

Write down how often you plan to review your portfolio, and pop a reminder in your diary. This includes general monitoring, but also a regular health check to see whether your portfolio needs rebalancing.

If one of your investments performs particularly positively or negatively, your portfolio could become overweighted or underweighted in one particular area. If this happens, you might decide to buy or sell some of your investments to restore your portfolio to your planned asset allocation.

6.  How will you respond to market events

It’s easy to lose sight of your strategy during times of intense market volatility, so write down how you plan to respond to market changes.

If the market rises or falls by a particular percentage, will you adjust your asset allocation? Will you sell certain investments? Will you do nothing and just wait?

Preparing for these events is like having a good fire escape plan. You might never need it, but if you do smell smoke one day, you’ll be more likely to keep a cool head as you’ll know what to do.

Stick with it

Your investment plan is there to help you, and you wrote it based on your goals and risk tolerance. So once you’ve got a plan in place, try to stick with it.

Keep learning about the market and becoming more aware of yourself as an investor. Reflect on every investment decision you make (whether you get a good result or not) and if necessary, adjust your investment plan for the future.

Everybody’s circumstances are different, and there’s no “one size fits all” approach to investing. If you need help with making or updating your investment plan, you should consider getting professional advice.