Creating a investment plan requires a little more than simply establishing a savings account and buying a few random shares of stocks or in any other things. It is rather a structure a plans and subplans that is right, it's important to understand where you're at and what you want to accomplish with the investments. Then, you'll define how to reach those goals and select the best investment options to reach them. The good news is that it is never too late to create and implement a personal investment plan and begin creating a nest egg for the future.
Rule1: Know your current situation:
AGE: In every decision you make, your age makes a significant impact like
- The younger you are, the more risk you can take. That's because you have more time to recover from a market downturn or loss of value in a particular investment. So, if you're in your 20's, you can allocate more of your portfolio to more aggressive investments (like growth-oriented and small-cap companies for example).
- If you're nearing retirement, allocate more of your portfolio to less aggressive investments, like fixed-income, and large-cap value companies.
Current Financial situations: Knowing your current financial situation is the most important decision and availability of money in case of crunches is important to gauze your investment. Take a look at your budget and determine how much money is left over for investments following your monthly expenses and after you have set aside an emergency fund equivalent to three to 6 months' worth of expenses.
What do you want to do with the money you make from your investments? Do you want to retire early? Do you want to buy a new house?
The rule is, what are you're going to want a diversified portfolio no matter what your goal is (buying a house, savings for future expenses, etc.). The idea is to let the investment grow over a long period of time so that you have enough to pay for the goal.
If your goal is particularly aggressive, you should put more money in the investment periodically rather than opting for a more risky investment. That way, you're more likely to achieve your goal rather than lose the money that you've invested.
Rule3: Liquidity: Know the level of liquidity you need. A liquid asset is asses that can be easily converted to cash. That way, you'll have quick access to the money if you need it in an emergency.
- Stocks and mutual funds are very liquid and can be converted into cash, usually in a matter of days.
- Real estate is not very liquid. It usually takes weeks or months to convert a property to cash.
Rule4: Creating the Plan
Every month, you might want to put 30% of your investment money into stocks, another 30% into bonds, and the remaining 40% into a savings account. Adjust those percentages and investment options so that they're in line with your financial goals.
If you put 90% of your disposable income into stocks every month, then you're going to lose a lot of money if the stock market crashes. That might be a risk that you're willing to take, but be sure that's the case.
Evaluate your investments from time to time. Check to see if they're performing according to your goals. If not, reevaluate your investments and determine where changes need to be made.
Alter your plan if you need to change your risk profile. Generally speaking, as you get older, you'll want to take less risk. Be sure to adjust your investments accordingly.
- If you have money in risky investments, it's a good idea to sell them and move the money to more stable investments when you get older.
- If your finances tolerate the volatility of your portfolio very well, you might want to take on even more risk so that you can reach your goals sooner.
There is high level of risk involved in all this plans, make sure you analyze and compare with other options before taking any steps regarding your inesting plans.
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