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How to create an investment plan


Creating a financial plan is the first – and perhaps most important – step in investing.
Yet, that is not the way most people start their investing journey. Typically it starts with savings being built up and the realisation that there are sufficient funds to invest into longer-term growth opportunities.

From there, it often develops more as a collection of assets – direct shares, exchange traded funds (ETFs), and perhaps property – rather than into an overall financial plan.

Which is why at times the value of a financial plan and the financial advice that often goes with it if you work with a professional financial planner can be heavily undervalued. This is because a well-thought-out investment plan will set goals and provide a roadmap for investors to get there and also protects them from falling into some common behavioural traps that can be detrimental to their returns.

  • For example, without a plan, you may be more inclined to try and time the market to chase overall returns or over-react when markets swoon, rather than invest with your personal, long-term goals in mind.
  • Another example is that without a plan, you may be tempted to build a portfolio based on transitory factors such as news headlines, hype or fund ratings, or one that lacks appropriate diversification across markets and asset classes; all factors that can have a negative impact on long-term investment success.

Below are a few suggestions on how to create an investment plan so you can avoid these pitfalls.

Set goals

  • A sound plan begins with the basics of a budget and then identifying achievable goals. Just as a first-time runner wouldn't expect to complete a marathon the next day, you shouldn't count on a sudden windfall. Instead you should set realistic expectations based on both your current financial situation and future plans.
  • The aim for all investors is to build wealth but that is ultimately a means to an end, whether it be funding your retirement lifestyle, paying education expenses or a must-do holiday. So setting specific goals coupled with the dollar amount you wish to achieve and when you would like to achieve it by can be a powerful motivator for spending and investing discipline.
  • For example, your goal could be saving up for a first-home deposit of $100,000 in five years, or saving $1,000,000 for retirement over the next 30 years. This in turn allows you to figure out what percentage return you need to generate annually in order to reach those goals– a definite reality check.
  • Whatever your purpose for investing is, make sure it is clearly defined and attainable.

Clarify constraints

  • Along with understanding your goals, you should also understand what resources you currently have and what constraints there may be.
  • Key questions to consider include what is your monthly income and what are your expenses? How much can you contribute on a regular or periodic basis? What is your risk tolerance? It may sound boring but setting a budget and sticking to it is fundamental.
  • Other constraints can include costs of investing, exposure to taxes, liquidity requirements or even, investments to avoid.

Determine asset allocation

  • Asset allocation refers to the way in which a portfolio is divided between asset classes. This decision is the key driver of a portfolio's return variability.
  • A balanced asset allocation that incorporates a variety of asset classes and markets is a powerful way to manage risks. This is because different asset classes behave in different ways.
  • For example, if the equity market is weakening, it's likely that bond markets are strengthening because these two asset classes generally move in opposite directions. Having both asset classes in a portfolio can mitigate any adverse market movements, while at the same time ensure participation in stronger-performing segments.

Decide on monitoring frequency

  • Periodically monitoring and evaluating a portfolio relative to savings targets, return expectations and long-term objective is an important part of investing. But be careful of over-monitoring and adjusting asset allocations based on short-term market movements.
  • Just like how observing plants every hour will not reveal obvious growth, constantly checking on your investments is equally as unproductive and may instead create anxiety.
  • Your portfolio value will fluctuate daily; it will go up and down by the hour. By deciding at the outset how often you will check your portfolio and rebalance, you can more easily avoid unnecessary stress or the temptation to time the market and day trade.
  • One of Vanguard's key principles for investment success is to adopt a long-term view and to stay the course. This means maintaining perspective and sticking to your investment plan, even in periods of market uncertainty.
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