An Insight into 4 Phases of Investment Planning
Many people want to create their investment portfolio but are not sure how to select the right financial products which will match their investment goals. If you are also facing the same dilemma then the information we will be providing in the following sections will help you properly judge your situation and take the right decision. We will look at four phases of investment planning which will help you understand the process and take necessary actions accordingly.
4 Phases of Investment Planning
- Phase 1 – Assess Your Position
- Phase 2 – Establish Goals
- Phase 3 – Create a Plan
- Phase 4 – Evaluate Progress
Phase #1: Assess Your Position
Consider Your Age
The investment strategy to use will largely depend upon your age. You will be able to take more risks when you are younger since you will get more time to recuperate from losses suffered on any investment due to market downturns. Thus, if your age is under 30, you can have aggressive investments in your portfolio, as for instance, small cap or growth oriented companies. On the other hand in case you are close to your retirement age then selecting less aggressive investments should be the aim. Large cap value and fixed income companies should ideally be part of your portfolio.
Consider Financial Position
You need to figure out the amount of disposable income you can utilize for investment purpose. For this purpose you will have to examine your budget for determining the amount which that will be left after paying for monthly expenditures. In addition to it, you will have to keep aside emergency funds so that you can pay your expenses for at least 3-6 months (in case such need arises). The balance amount can be utilized for investment purposes.
Risk profile is useful in determining the amount of risk you can take or are willing to take. Oftentimes, even young people do not want to risk their investment. Thus, selection of investment portfolio largely depends upon risk profile a person has. In terms of risk, stocks are considered to be a lot more risky as compared to bank accounts and bonds. But you also need to understand that less risk you take, less money you will make.
Phase #2: Establish Goals
First of all you will have to decide what you will do with returns you will be earning on your investment. Would you like to purchase a house? Retire early? Keep money aside for kid's education?
Generally, you should look to diversify your investment portfolio so that your investments keep growing over a period of time. In case you have an aggressive goal then a better option will be to increase your contribution towards existing investments instead of choosing risky investments. This way you will be able to accomplish your goals and not lose your investment.
How quickly financial goals are to be achieved dictates the kind of investments you will have to select. If quick returns are required then you need to take risks and opt for aggressive investment options which may lead to losses as well. However, if your aim is to build wealth gradually then investments which provide slower returns would be a suitable option for you to explore.
Judge Level of Liquidity Required
Another factor on which selection of type of investment would depend upon is the amount of liquidity you desire to have. Higher liquidity means you will be able to quickly turn your investments into cash in case any emergency arises.
- Normally, mutual funds have required liquidity and within a short period of time you can convert them into cash.
- On the other hand, investments such as in real estate are not so liquid and it can take few months to convert them into cash.
Phase #3: Create a Plan
- Diversification: Diversification is a better approach in comparison to investing all your funds into a single investment product. At the time of creating investment plan you will have to keep this point in mind.
- Financial Advisor: In case you are not sure how to move ahead with correct investment planning then you can take help of a financial advisor to move in the right direction.
Phase #4: Evaluate Progress
- Regular Monitoring: You need to regularly monitor your accounts to be sure they are performing as required.
- Adjust Risk Profile: As you grow older, the willingness to take risks will reduce and as such you will have to change your investment plan accordingly.
- Evaluate Contributions: It will also be necessary to check whether you are contributing sufficiently into investments for achieving desired goals. If not then you will have to change contributions accordingly.
To conclude we will say that investment planning requires a lot of analysis to ensure that you are investing your hard earned money in suitable financial products. By taking right steps you can safeguard your investment as well as earn desired returns.