An Investment Plan Requires Key Considerations

Investment Plans Made Easy

Graphs and charts on an iPad.
Your investment plan requires forethought. Growth requires the right balance of risk and time.. John Lamb / Getty Images

To make a solid investment plan ask yourself the right questions and patiently work through the answers. Build an investment plan based on answers to the five questions below and you'll definitely make wiser choices.

1. Which purpose am I pursuing? 

Investments must be chosen with a main goal in mind: safety, income or growth. The first thing you need to decide is which of those three characteristics is most important.

Do you need current income, growth so the investments can provide income later, or is safety your top priority?

2. How much can I realistically set aside for investing?

Many investment choices have minimum investment amounts, so before you can lay out a solid investment plan you have to decide how much you can invest. Do you have a lump sum, or are you able to make regular monthly contributions?

Some index mutual funds allow you to open an account with as little as $3,000 and then set up an automatic investment plan starting with as little as $50 a month which would transfer funds from your checking account to your investment account.

If you have a larger sum to invest, obviously more options are available to you.

In that case you'll want to use a variety of investments, so you can minimize the risk of choosing just one.

    3.  When will I need this money again?

    Establishing a time frame you can stick with is of the utmost importance. If you need the money to buy a car in a year or two, you will create a different investment plan than if you are putting money into a 401(k) plan on a monthly basis for the future.

    In the first case, your primary concern is not losing money before the future purchase. In the second case, it is irrelevant what the account value is worth after one year because positioning the account for growth is the name of the game, and it may not be immediate. In reality, significant growth typically requires at least 5 years or more of time in the market.

    4. How much risk should I take?

    Some investments entail what I call a level five investment risk; the risk that you can lose all your money.

    These investments are too risky for most people.

    One easy way to reduce investment risk is to diversify. By doing so you may still experience swings in investment value, however, you can reduce the risk of a complete loss due to bad timing or other unfortunate circumstances.

    5. What should I invest in?

    Too many people buy the first investment product presented to them. Better to lay out a thorough list of all the choices that meet your stated goal. Then take the time to understand the pros and cons of each. Next, narrow your final investment choices down to a few that you feel confident about.

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