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Do You Have a Plan for Personal Investment?

[dropcap background=”” color=”” circle=”0″]N[/dropcap]o matter what you endeavor to do, success is much easier if you have a written plan. This is true when it comes to weight loss, buying a home, starting a business, and it’s definitely true when it comes to investment. It is too important to not have each step planned out on paper.

The Two Main Benefits of an Investment Plan

There are two main reasons to write out your personal investment plan:

  • It allows you to predetermine the most sensible future actions
  • It will help you stay focused when your mind plays tricks on you

Overriding Your Own Mental Warfare

Let’s elaborate further on the second point. Most people tend to be overconfident in their judgment of themselves. This is why a written plan helps by keeping you on task when your mind is sidetracked by other information.

For example, 37% of engineers rank themselves in the top 5% of their field (Clayson, 2005). 25% of high-school seniors think they are in the top 1% when it comes to getting along with others (Gilovich, 1991). 93% of drivers in America and 69% of them in Sweden believe they are “above average” (Svenson, 1981).

What this shows is that an objective, thorough plan can be your best friend when your brain tries intervening with overconfidence. Down the line, it may tell you that investing isn’t as important because you’re naturally good with money. You might start to believe that a plan is just for those who don’t fall into your percentile. This phenomenon is perfectly natural, but a plan is necessary in order to beat it.

Be the Exception

Most people don’t have a written plan when it comes to their money. Is it any wonder, then, that so many are struggling with their finances? Without a written plan, people are essentially flying by the seat of their pants, despite the vital role investment plays in one’s life.

Keep It Simple

Fortunately, an effective plan doesn’t need a million moving parts. Instead, it should cover six simple areas:

  • Investment and Retirement Goals
  • How Much You’ll Need to Invest
  • How Much You’ll Need to Regularly Contribute
  • The Risks and Returns You Should Expect
  • Asset Allocation
  • Monitoring and Reassessing

At the end of the day, a complex investment strategy is rarely followed. As the last step above makes clear, you can always reassess the strategy as you go. The important thing is that you put one to paper as soon as possible and begin following it as best you can.

To be clear, this also means you don’t need all the data right now. You could spend years designing the “perfect” plan by reading every book and article out there and attending every seminar possible. That will be a lot of time spent without a personal investment plan in place. Start now and revise it as necessary in the future.

Two Critical Questions

No matter what your goals are for investing, they need to involve retirement. When you retire, the money you set aside through savings and investments will likely be the only capital you have coming in. To plan accordingly, you need to think about:

  • When You Will Retire
  • How Long You Will Live

Conventional wisdom suggests you begin saving in your 20s by putting aside 10% to 15% of your income, and in my opinion this is sufficient for the majority of people.

The Basic Financial Plan

To reiterate: Simplicity is your friend. Here’s how easy the first step of your plan needs to be:

“In __ years, I want __ amount of money. I have __ dollars to invest.”

As simple as this starting point is, your goals should also be SMART:

  • Specific
  • Measurable
  • Achievable
  • Relevant
  • Time-bound

It is absolutely crucial that you have a personal investment plan working for your benefit. The consequences of going ahead in life without one will be severe. However, as the above should make clear, this doesn’t mean a herculean effort on your part. Begin today by filling in the blanks above on paper and you’ll be well on your way.

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