Creating an Investment Plan

Assess Your Financial Situation

When developing an investment plan, you should start by self-assessing your current financial situation to determine how much money you can afford to invest. Doing so can give you a better understanding of your risk tolerance, which plays a big role in determining how you develop your investment strategies.

Remember: never invest more than you can afford to lose. If you allocate more money than your financial situation dictates is appropriate, you increase the likelihood of making irrational, emotionally driven decisions that may undermine the premise of your plan, potentially leading to a delay in reaching your goals or even losses.

Set Specific Goals

When planning, it’s important to set specific goals. These goals may include the reason you’re investing and what it is you wish to achieve from investing.

For example, are you investing for general wealth creation, a home deposit, a mortgage or retirement? By setting and understanding your goals, you’re developing a target to work towards and can therefore develop an investment strategy dedicated to reaching these goals.

Developing investment goals are important as they can provide direction, motivation and accountability. If you’re having trouble developing your investment goals, perhaps try using the SMART criteria. That is, that your goals are specific, measurable, achievable, relevant and time-based.

Example: Luke is a cryptocurrency investor who works full-time as a teacher. He plans to dollar-cost average into bitcoin with the goal of having $50,000 AUD for a house deposit. He knows he can afford $100 a week to put towards bitcoin and aims to make a 100% return on his bitcoin investment.

Specific: Luke’s goal is to invest in cryptocurrency so he has enough for a house deposit in 5 years. It is a specific and clear goal, something he can write on a whiteboard as a visual reminder.

Measurement: Luke can monitor and track the progress of his goal by looking at the total return on his investment or how close he is to his $50,000 target.

Achievable: Luke has set himself a realistic goal and time frame to achieve it. He isn’t aiming to make $1 million or to 50x his investment, for example.

Relevant: You can’t keep a goal which you aren’t interested in. Luke has set himself a relevant goal which aligns with his life goals, making him more willing to stick to his plan.

Time-based: Luke has set himself 5 years to achieve this, which is a realistic time frame considering his goal to double his total investment. For example, it wouldn’t make sense to aim for a 100% gain in a few days.

Develop a Realistic Time Horizon

While setting your investment goals, you may want to develop a realistic time horizon for when you want to achieve these by. For example, if you’re investing for retirement, your time horizon may be significantly longer than if you were investing to save for a mortgage deposit 5 years from now.

It’s also important to thoroughly research the assets within your portfolio to assess whether their risk-reward ratio aligns with your time horizon.

Develop a Strategy to Meet Those Goals

Once you’ve identified your investment goals and time horizon, you can develop a strategy to meet those goals.

This is where you can establish rules and processes on things such as portfolio rebalancing, profit-taking and/or tax. You may include the types of investments you want to put money into and your reasons for doing so.

You might outline a set of criteria to meet before selling your investment. Take Emma for example. After researching Ethereum, she concludes that ETH is undervalued and wants to invest. Emma spends $2,000 AUD buying 10 ETH at a price of $200 per ETH.

Before buying, Emma spent time thinking about what she’d do in scenarios where the price of ETH rises. The rules she created for herself are as follows:

  1. If ETH falls below $200, do nothing.
  2. If ETH hits $300, sell 25% of the 10 ETH. After doing so, Emma will have cashed out $750 and still have 7.5 ETH.
  3. If ETH hits $500, sell 50% of the remaining 7.5 ETH. After doing so, Emma will have cashed out $2,625 ($750 + $1,875) and still have 3.75 ETH.
  4. If ETH hits $700, sell 100% of the remaining 3.75 ETH. After doing so, Emma will have cashed out $5,250 ($750 + $1,875 + $2,625) and have 0 ETH left.

If ETH did hit $700, Emma will have made a profit of $3,250 ($5,250 – $2,000)—that’s assuming she followed the above rules that she created.

Hold Yourself Accountable

Develop methods to measure and hold yourself accountable to your strategy. An effective way to do this is to document your goals, strategies and any investment rules, and display them somewhere you see most days (such as your desk, vision board or wall).

Another way to hold yourself accountable may be to confide your investment goals or strategy in a trusted friend or family member, or even a professional such as a financial planner.

Tracking and learning from past investments can help you gauge your performance and identify areas where your investments are contradicting your plan. Remember, plans are only as effective as your ability to stick to them!

Continued Research & Professional Guidance

It’s important to develop an investment plan that is specific to your individual situation. Consider conducting your own research into investment planning to develop a more comprehensive plan that satisfies your needs. Also, consider consulting a licensed investment planner to tailor personalised advice to your specific needs.