Developing an Investment Plan

How can you develop an investment plan that will grow your savings and provide the resources you need for the future? It’s not the purpose of my writing to provide advice about specific investments. Rather, I want to give you the time-tested principles that make up a solid investment plan.

Set Clear Objectives

Your first step in creating a successful investment plan is to understand your goals and objectives. You’ll need to answer the question, “What am I saving for?” For example, you might set a goal of funding your retirement and paying for half the cost of your children’s education. To determine what steps you should take today to accomplish these goals, you’ll need to answer a few more questions:

• How much money will be needed in the future (factoring in inflation) to fund the goals you’ve set?

• What’s a reasonable rate of return you can expect to earn on your investments?

• How long do you have to save before you’ll need to tap in to the savings for each of your goals?

Once you’ve answered these questions, it becomes possible to estimate the amount you’ll need to save and invest each month so you’ll have the money needed at the appropriate time. The 7 Steps to Becoming Financially Free — Workbook provides examples that will help you apply these steps to your own situation.

Understand Your Investments: Keep It Simple

The second investing principle is to understand what you’re investing in. Today’s investment world offers a wide range of opportunities. Some of these are straightforward and easily understandable, while others come with a high level of complexity. For some reason, when it comes to investing, people tend to get involved with things they don’t understand. I’m sure this has to do with the “promise” of making killer returns, yet it’s also a good way to lose bundles of money.

For most of us who are focused on raising families and working to make ends meet, we have a limited amount of time to spend on learning about and being actively engaged with the investment world. While it’s important for everyone to have a basic understanding, unless you plan on becoming a very active investor and have the time to do so, you’ll want to develop a more simple strategy. The good news is that with the tools available today, it is much easier to succeed with your investment objectives than it has been in the past.

Unless you use the services of a trusted investment professional or have loads of time and the interest to do your own research, I wouldn’t recommend investing in individual stocks and bonds. A more effective approach for the average investor is to purchase stocks as part of a mutual fund. The concept behind a mutual fund is very simple: People pool their money together under the management of a professional, called a “fund manager,” who then uses the money to purchase a number of different stocks.

There are many benefits to owning mutual funds. They provide for diversification, a principle found in Ecclesiastes 11:2. Diversification simply means not putting all your eggs in one basket — or in this case, not putting all of your money into one stock. It’s always possible for a single stock to suffer from unforeseen negative results, and it wouldn’t be wise to have all of your savings tied up in one place. Just consider those who lost so much with the Enron and WorldCom debacles.

Mutual Fund Considerations

There are literally thousands of mutual funds available, which makes the selection process a bit difficult. But there are tools available to help you select and monitor the progress of funds that are appropriate for you. In fact, you’ll find that there are mutual funds for just about every stage of your investing life. Most investment firms offer these funds according to a few broad risk and type categories, such as aggressive or growth, moderate, conservative, and international.

The aggressive funds typically seek to own stock in companies that will grow at above-average rates. These are often smaller companies that have a promising product. The more conservative funds will often purchase the stock of larger companies that have proven track records and can be counted on for more consistent results. The goal of the more conservative funds is to provide a reasonable return at a lower level of risk than the more aggressive funds. As you would expect, moderate funds fall between these two from a risk perspective. International funds allow you to invest in stocks of businesses outside the United States, including those of emerging economies, where higher growth rates are expected, although with a higher risk level.

This touches on an important subject for investors: the relationship between risk and rate of return. To the extent that investors accept a higher level of risk with an investment, they expect to earn a higher return. It’s important for you to understand this principle and to develop a sense as to what your risk-tolerance level is. It’s not unusual for a husband to be open to taking higher levels of risk than his wife (or vice versa), and sometimes this is a good thing, because you’ll need to accept some risk over your investing lifetime if you want to achieve your goals. At the same time, some people have a tendency to “let it roll” and may fall into the trap of trying to get rich quick, making some very poor decisions in the process. In these cases, the more conservative spouse (in my experience, this is usually the wife) can bring proper balance to the situation. Take the time to share your perspectives on risk tolerance with each other. You’ll find that it helps you achieve a more appropriate investment mix for your circumstances.

Most investment advisors will suggest that people allocate their savings into fund categories based on how long they can invest the money and not need to tap in to it. The longer the funds have to grow, the higher the allocation can be toward growth or higher-risk investments. If the time-frame is relatively short (five to ten years), most advisors will suggest a more conservative allocation to limit the possibility of a sharp decline in your investments just as you may need to cash them out.

If you’re more comfortable with conservative ventures, an important point to remember is the impact that inflation has on the long-term value of your investments. If inflation is running at 3 percent annually and you have all your money in certificates of deposit (CDs) earning an average of 4 percent, you’re losing ground, especially after taxes. It’s important that your overall investment strategy and risk tolerance takes into account the negative impact of inflation. Again, a reasonable long-term rate of return in the stock market is 10 percent, and you’ll need to accept moderate levels of risk to achieve this rate of return.

Phil Lenahan is President of Veritas Financial Ministries. If you have questions you would like Phil to address, please email them to [email protected].