To make a solid investment plan, you need to ask yourself the right questions, and patiently work through the answers. To ensure that you make an informed decision with regard to investment planning, build it based on answers to the questions below.
- What is the purpose of your investment? Any investment plan needs a main purpose. You should choose investments with a main goal in your mind like Safety, Income, Growth. The first thing you need to decide is which of those 3 characteristics is the most important. Do you need current income, growth so that the investments can provide you with income later or is safety your top priority?
- When will you need to use the money? An investment plan needs to a time frame. Establishing a time frame you can stick with is of the utmost importance. If you need the money to buy a car in a year or two you will create a different investment plan than if you are putting money into a retirement plan on a monthly basis and won’t use the money until after you have retired. In the first case, your primary concern is what the account will be worth in a year. In the second case, it is irrelevant what the account is worth in a year. What matters in the second case is positioning the account for growth so it is worth more when you’ve reached your retirement age.
- How much money do you have to invest? your investment plan needs to specify how much you will invest and how often. Many investment choices have a minimum investment amounts, so before you can lay out a solid investment plan you have to decide how much you can invest. Do you have a lump sum or are you able to make regular monthly contributions? Some index mutual funds allow you to open an account with as little as $ 2900 and then set up an automatic investment plan starting with as little as $ 50 a month which would transfer funds from your checking account to your investment account.
- Do you understand investment risk? an investment plan needs to account for the level of risk you are comfortable taking. Some investments have a high risk, meaning that you can lose all your money. One way to reduce investment risk is to diversify. By doing so you may still experience large swings in investment value, but you can eliminate the risk of a complete loss.
- Have you made a list of available investment choices? You can’t create a good investment plan until you understand the choices available. It is better to lay out a list of all the choices that meet your stated goal. Then take time to understand the pros and cons of each. Next, narrow your final investment choices down to a few that you feel confident about.