Investing without an investment plan is like driving in a strange city with no maps of GPS. As other drivers zip pas onto their destinations, you’re left behind with no idea how to get where you want to be. “Nothing is worse than reaching a certain age and realising you’re below where you’d hoped you’d be (financially), says Kevin Cooper, head of investment research at AMG Funds. That often comes back to not having an investment strategy.
Use these 9 questions to help you build your investment strategy road map – so you don’t end up in Hackensack, when you wanted Hawaii.
1. Where am I currently?
You can’t map your path forward until you know where you’re starting from. The first step in building an investment strategy is organising your financial life, says Amin Dabit, director of advisory service at Personal Capital. Getting a clear picture of your current income, spending, saving and net worth (assets minus liabilities) is the foundation to putting yourself on the right path, he says. As you’re taking your financial measure, keep an eye out for what may be missing from your picture, such as an emergency fund or retirement contributions.
2. Where do I want to be?
Now that you know where you are, it’s time to turn an eye toward where you want to go. What are your financial goals? These can be short-, medium- or long-term goals. Do you want to buy a house? Retire in Bali? Have $1 million? Yes, you can have more than one financial goal. This is your dream financial road trip: List anything and everything you hope to accomplish with your investments. “If you can define that, you’re well along your journey to constructing a good portfolio” says Marc Dizard, investment regional manager at PNC Wealth Management.
3. What financial goals do I want most?
While you’ll hopefully accomplish all of your financial goals, chances are you don’t have unlimited resources to devote to them. Once you’ve defined your goals, the goals you want most should be your priorities, regardless of their time frame. For instance, if retirement is important to you and you want to make sure you get there, you need to start saving now, Dabit says, even if you also hope to pay for your kid’s college before then.
4. What investment return do I need to reach my financial goals?
By this point your investment strategy road map should be starting to take shape. You know your starting point and which stops you want to hit along the way. The next question is how fast you need to drive to get there on time. In investing speak this means: What investment return do you need to reach your goals within your time frame? The easiest way to find out is with online calculators such as those provided by most financial services institutions. Look for one that takes variables like inflation and how much you contribute each year into account.
5. If my investments drop 20% how will that make me feel?
So you know how fast you need to drive to reach your goals, but can you stomach those speeds? Risk tolerance is essentially the answer to the question: How bumpy of an investment ride are you willing to tolerate? Even the best investment plan won’t do you any good if you can’t stick with it over all the potholes. Be realistic and honest about how you’d handle certain market conditions, Cooper says, both the ups and downs: if the markets rose 20% but your portfolio only rose 10% would you deviate from your plan?
6. What allocation will let me achieve my goals and still sleep well at night?
Allocation is the biggest factor in reaching your goals, Dabit says. The objective of any investment strategy is to find an asset allocation that won’t make you “car sick” but can still get you to your goals on time. Aim to create a portfolio that lets you take the least risk possible to reach your goals. Often this means the lesser of your own risk tolerance and the return needed to achieve your goals. Each of your goals will likely require a different asset allocation because they’ll have different timelines and targets.
7. How do I define failure?
Failure isn’t something anyone likes to think about, but it’s an important step in creating an investment plan. Having a clear definition of failure for each of your financial goals will help you construct an investment strategy to minimize the chances of such an adverse outcome. For instance, if failure for you is dropping below a certain dollar amount, you may want a more moderate allocation between stocks and bonds to reduce volatility. However, if failure is not having enough income in your retirement 30 years from now, you might focus on stocks and accept what volatility may come.
8. How will I track my progress?
You’ve built an investment strategy road map to reach your financial goals; the question now is how you’ll use that map to track your progress? It can be helpful to have an idea of where you expect to be at certain points on your journey, Cooper says. Sort of like mapping out your meals and bathroom breaks along the way. Cooper advocates quarterly reviews, “not with the idea of changing your underlying asset allocation but just to make sure it’s in line with your long-term expectations.” At an absolute minimum, check-in once a year or when you have a life event change, Dabit says.
9. Do I want to do this on my own?
Every driver needs to take breaks now and then. If being solely responsible for building and monitoring an investment strategy sounds daunting to you, you’re not alone. Hence why there’s an entire industry built around helping people do exactly this. “Do you have the time and resources to devote to your portfolio so you feel like you’ll have a successful outcome? Dizard asks. If you don’t or if you just don’t want to be the only driver on this road trip, find a financial advisor co-pilot to assist you in reaching your financial goals.
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