To make an investment plan is not about choosing few stocks to invest your money in, It goes beyond that. First, you have to consider your current financial situation and goals. Then, define a timeline to know how much you are willing to risk. This will then help you to determine your optimal asset allocation. However, if you are yet to make that investment plan, here is the step-by-step guide to planning investment. Also, discover the best investments worth investing in. What is an Investment plan?
An investment plan is a process of matching financial goals with financial resources. Meanwhile, it’s also an important component of financial planning. However, the investment plan consists of a list of all irregular costs sustained during the beginning of the investment.
Basically, it is important to understand every risk involved in investment before setting up an investment plan that will work for you. Therefore, below explained more on investment risks every individual or corporate investor should know.
Investment always exposed investors to different risks. Meanwhile, these risks have unique ways of affecting investment returns. It can involve a high risk for high yield return, and a low risk for a low yield return. Below, explained better different types of investment risks, and it’s important you know each of these risks. So, as to understand how they affect your investment return, before building your investment plan.
#1. Market Risk
Market risk involve the equity risk, interest rate risk, and currency risk.
- Equity risk: As equity is always connected to investment in shares. Therefore, it can be defined as the risk of loss involved in the drop in the market price of shares.
- Interest rate risk: This is applicable to bond investments. It is a loss due to fluctuations in interest rates. For example, when interest rates rise, bond market prices fall.
- Currency risk: Currency risk applies to foreign investments. Individuals who own foreign investments are likely to lose money due to movement in the exchange rate. For instance, if the U.S. dollar drop in value relating to the Canadian dollar, your U.S. stocks will worthless in Canadian dollars.
#2. Liquidity Risk
This involves the risk of not able to sell your investment at a reasonable price to back your money when the need arises. You may have to accept a lower price just to sell your investment. In some cases, with duty-free market investments, you may not be able to sell your investment at all.
#3. Credit Risk
Just like interest rate risk, credit risk also involves debt investments such as bonds. This is the risk of losing your principal fund or interest on bonds you bought when the company suddenly goes bankrupt.
Meanwhile, you can estimate credit risk by studying the bond credit rate. For example, long-term Canadian government bonds have an AAA credit rate, therefore, it shows a low possibility of credit risk.
#4. Risk on Reinvestment
There may involve a loss of your income as a result of drop in interest rate as a result of reinvestment, this is what is regard as reinvestment risk.
#5. Inflation Risk
Since the value of the investment does not depend on inflation, there is a risk of loss of purchasing power. However, inflation reduces the purchasing power of money over time. The number of goods or services you will purchase may decrease, and the amount still remains the same.
Note: There are many other types of risks to consider before building an investment plan, but the above five stand as the common investment risks. However, that takes us to personal investment plan below and how you can build a unique and successful investment plan for yourself.
Personal Investment Plan
Personal Investment Plans (PIPs) are life insurance one-off investments and fixed income securities (Bond). It is always targeted at delivering capital or income growth over the medium to long term, at least 5-10 years.
Moreover, you are the one to choose where to invest your money. It can be in buying of shares unit in several funds that suits your needs and attitude to investment risk. However, the value of your personal investment plan can go down. As a result, you may not be able to get back your investment.
Steps to Build your Personal Investment Plan
Writing an investment plan can be of great help in achieving your long-term goals. This will help ensure that you have more discipline in making investment decisions and invest in a way that suits your personal needs. Anyway, follow the following steps below to create your personal investment plan today.
- Define your present financial situation: Understand your current income, which will help you to know what amount of money you can be able to invest. You can achieve this by making a budget to determine your monthly income after expenditures and emergency fund savings.
- Determine your investment goal: This involves why you want to invest your money and what you hoping to earn from your investment.
- Know how much to risk: The next step in an investment plan is to identify the risks you are willing to take. In general, the younger you are, the greater risk you can take because your portfolio has time to recover from losses. Meanwhile, older people should look for less risky investments and invest more money earlier to stimulate growth.
Read Also: APR: Definition, Simplified Guide Explained(+ how it works).
- Decide on what to invest in: The final step is deciding what and where to invest. There are different types of accounts you can use for investment. Meanwhile, your budget, goals, and risk tolerance will help you make the right type of investment suitable for you. Investing in stocks, bonds, mutual funds, long-term options, and bank savings accounts or CDs is best for education savings. You can also invest in real estate, works of art, and other tangible items.
- Track your investment: Once you have invested, it is not wise to ignore it. From time to time, you need to check your investment performance and determine if a rebalancing is necessary.
Note: On deciding on what and where to invest your money, it is advisable to seek the help of a financial advisor. Meanwhile, you have to diversify your portfolio. You don’t need to put all of your money in one investment like stocks for example. So, you don’t stand the risk of losing your money if the stock market smashes.
Just like in any other field of personal finance, you need research and experience to be a good investor. If you are a beginner, the experience will come later, just concentrate on getting information about the different types of investments available for you.
Moreover, take enough time to consider all potential intermediaries you could open an account with. But, when making your comparisons, check each company’s transaction fees, available investments, mobile, online features, and more.