A Guide to the Basics of Investment Planning for Beginners
Key Takeaways:
- The basics of investment planning basics aligns you with your goals
- A guide for your financial freedom journey
- A financial freedom framework for the long term
In this post, we’ll cover the basics of investment planning for your financial future. Then, perform portfolio rebalancing if your investments deviate from the initial financial plan.
The traditional mix of financial assets for your plan will include stocks (equities), Exchange Traded Funds (ETFs), Bonds, T-Bills, Certificates of Deposit (CDs), etc.
The investment portfolio rebalancing act is performed once every other year or so. If your assets do not experience a drastic shift from the initial allocations, you should be fine holding it as is. Financial maintenance is one of the basics of investment planning inputs we’ll look at.
The Basics of Investment Planning
Of all the aspects of life that require planning, you shouldn’t invest your dollars without putting a plan in place. Planning is not a reserve left for the pros alone; you too can put stuff on paper to guide your financial affairs.
Financial Goals: Some of the elements of the basics of investment planning will include a personal charter. This should read: “I save 20% of my net paycheck each month to buy securities”.
Time Horizon: I’m investing for retirement and hope to create passive income in my golden years, in 30 years to come.
You can have profound statements that show intentional commitment, or you could leave things in the form of a bullet list.
Example of an Investment Plan (A Summary)
- a) Investment Objective: Invest in equities for retirement
- b) Time Horizon: From my 20s (30s, or 40s) all the way to my 50th early retirement goal.
- c) Asset Classes: Stocks, ETFs, Treasury Bills, HYSAs.
- d) Asset Allocation:
Phase I: My Loading Phase (Age 18-35)
My Nest Egg: Stocks (80%), Others (20%).
My Emergency Fund: High-Yield Savings Account
(3 months’ wages).
Phase II: My Maturing Phase (Age 36-50)
My Nest Egg: Stocks (50%), ETFs (30%), Certificates of Deposit (20%).
My Emergency Fund: High-Yield Savings Account
(6 months’ wages).
Phase III: My Golden Phase (Age 51-Through Retirement)
My Nest Egg: Stocks (30%), ETFs (20%), T-Bills (40%), Cash (10%).
My Emergency Fund: High-Yield Savings Account
(7 months’ wages).
The above represents some of the basics of investment planning you could perform. I call this my instant napkin math example. This stuff shouldn’t be taken as investment advice. You should seek professional help if you want more comprehensive retirement planning.
The Simple Practice of Portfolio Rebalancing
Sometimes investments inside portfolios do move outside their intended allocations. For example, if a cash equivalent position of about 30% falls to only 9% due to overall growth in equity positions, you may want to sell some stocks to get the cash levels back to the original state.
Professional fund managers perform periodic portfolio rebalancing. This due diligence act has been slowly passed on to smaller individual investors. How unfair is that? This is because taking your risk tolerance level into consideration will help you manage your assets better for a prosperous financial future.
Rebalancing is one of those basics of investment planning that helps you sleep better at night. Its key function is to lock the percentage allocation amounts linked to each asset at each stage of your life.
Rebalancing simply trims or tops up each asset. The individual chunks will match the predetermined values on your investment plan.
Best Defense for Your Investments
Typically, occasionally updating your investments frees you from unnecessary stress. Set the asset allocation as a simple range.
Example of an Asset Allocation Range:
Financial Nest Egg: Stocks (60% to 90%) for Phase I
(This will ensure that you’ll do absolutely nothing until they spill out of the numerical boundaries you have set)
Yet again, the basics of investment planning require a strategy of defensive investing. Have a solid emergency fund. Your contingency savings will keep your fingers out of your financial nest egg if you ever get into financial difficulty.
Your Emergency cash should cushion you in the event of a loss of income, a health issue, or unexpected repairs to your home or car.
A Few Parting Words
You have to get the very basics of investment planning right. This is true for building nearly everything in life. Your investments are no exception. A prudent plan need not be complex.
A premium advisory service could set you back a few dollars, but a basic walk-through like the one above could get most people started.
Has the idea of portfolio rebalancing ever come up in your personal investing journey? Please share in the comments below.
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