How do I make an investment plan?

Key points

  • Setting an investment goal is key to ensuring that you are investing in the right things
  • Each investment goal can be broken up into some key attributes such as the return you are aiming for, your time frame and level of risk tolerance
  • Understanding the different attributes of your goal will help you to choose and manage investments that will give you the best chance of achieving your goal

“The trouble with not having a goal is that you can spend your life running up and down the field and never score” Bill Copeland

Successful Investing means different things to different people. Being clear about your investment goals is important as this will shape your decision making and how you measure your success. By breaking down your goal into the following key attributes you can start to consider which types of assets you can invest in.

Investment goal attributes:

Return objective – What kind of return are you after? Do you want income or a capital return?

  • Timeframe – when do you need the return? Are you flexible on timing?
  • Risk tolerance – Do you want certainty in your return or are you willing and able to ride market fluctuations?
  • Initial investment – How much do you have to invest now?
  • Ongoing Contributions – will you continue to contribute to your investment over your timeframe? If so how much and how frequently?
  • Investment experience – Do you have the skills and time to manage your investments or are you better placed in paying a professional to do it for you?

Let’s have a look at a few examples of investment goal, break down the key points and look at the outcomes

Case 1

David is a student and has a casual job. He lives at home and does not have significant living expenses. When he completes his studies in three years he plans to travel overseas for several months and would like to invest the money he saves from his casual job to increase the amount of money he has to spend on his trip.

Key Points Considerations
Return Objective Goal is to increase lump sum at the end of three years Short term from an investment context and will need to choose investments with little or no downside risk as he may not have time to ride out any investment downturns
Timeframe 3 years – fixed Will need to be able to withdraw total investment in three years
Risk Tolerance None
Initial Investment Small investment amount Limited ability to spread risk across multiple investments
Will want to minimise investment fees
Ongoing Contributions Contributions made throughout investment period Given casual work the contributions to the investment are difficult to estimate up front. Investment will need to be something that is easy to contribute to
Will want to minimise/eliminate any entry or exit fees
Investment Experience Limited time and investment experience Will want to keep it simple and stress free while he completes his studies

David has a firm investment horizon and a relatively short term which limits his investment choices. In his situation something like a high interest online savings account or a bank account that pays bonus interest with regular deposits could be appropriate. He may not have the time to ride out any downturns for more volatile investments such as shares.

Case 2

Gemma has been working full time for five years and wants to work towards purchasing a home in the next 5 – 7 years. So far she has saved $25,000 and is comfortably saving $1,000 each month. She is keen to achieve a strong return on her investment and is prepared to take some risk in doing so although she will want some help with her
investments. She has flexibility around when she would purchase a home and could wait if required.

Key Points Considerations
Return Objective Goal is to achieve strong growth in investment Is prepared to take some risk and therefore can consider investments with higher return potential but that have volatility
Timeframe 5 to 7 years – flexible Medium term investment term allows time to ride out periods of investment downturns
Risk Tolerance Moderate
Initial Investment Moderate investment amount Is able to spread risk across multiple investments Will want to minimise costs but can consider paying for someone to manage investments
Ongoing Contributions Contributions made throughout investment period Can commit to regular contributions [Could mention dollar cost averaging but could be too complex]
Will want to minimise any entry or exit fees
Investment Experience Limited time and investment experience Will want some assistance with management of investments

Gemma has a good savings history and has already accumulated a moderate investment sum. She has a longer investment horizon and appetite for some risk and could consider investing some of her money into shares which generally achieve higher returns than bank deposits. Share prices fluctuate and go down however Gemma has time to ride out
downturns. Given her lack of experience, she might be better off choosing investments that a professionally managed such as a managed fund or exchange traded fund.