Investment Planning is one of the most essential step towards creating a profitable investment. As per the popular website Investopedia, Investment is defined as an asset or item with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over the time. The main purpose of owning something as investment is to use it in the future to create wealth.
Investment Planning should never be treated to serve the same purpose as speculation or gambling. All three concepts (Investment planning, Speculation and Gambling) aim to serve the common purpose of making money. However they all are fundamentally different approaches. Speculation simply involves to attempt to make short term profit based on available uncertainty or inefficiency in the market. Gambling on the other hand, is purely based on chances and in most cases turn into negative overall expected returns.
What makes an Investment Planning different than Speculation or Gambling is the creation of future growth potential. The known appetite of risk associated with the Investment makes it different than other two categories. This ensures the reward based on the defined risk exposure in any investment opportunity for everyone.
Common guidelines for Investment Planning
Know Your Risk Appetite & Investment Goals
One of the most important step in successful investment planning is to make sure we are comfortable with its core components which are risk exposure, time horizon and investment goals. A good understanding of investment planning will help every individual to deal proactively with short-term ups and downs in the investments. Everyone who considers investing should understand the following items thoroughly for successful & stress free investing.
- Investment Goals: Having a good investment goal is one of the essential requirements for investment planning. This includes what kind of investments we are comfortable and what are our goal objectives. The familiarity in the industry w.r.t. seasonal and political impacts also help to understand and mitigate any short-term negative impacts. Such information also helps to avoid the stress and panic moments during investment time horizon.
- Time Horizon: A well defined time horizon is any key factor for successful investment. This helps us to be prepared with an effective exit plan in advance. Time horizon is very valuable because it gives a chance to mature our investments when it is needed the most.
- Risk Appetite: Knowing our risk tolerance is another important factor. This includes risk tolerance financially as well as emotionally. We should only plan for the investment for which we can afford the associated risk. Taking more risk than what an individual can afford turns any investment into a nightmare and leads to a terrible disappointment.
- Other Factors: There are other key factors which can have potential impacts on the investment performance over the time. Some of these include Taxation policies, political and environmental impacts, changing regulations, family commitments and much more. A good understanding of how to handle these circumstances, really helps everyone for a healthy investment experience.
Diversification is very important while creating your investment portfolio. A diverse portfolio helps to reduce the overall negative effect. A good way to understand how diversified portfolio helps reducing the overall risk of investment is using hedging techniques. Diversification can be done in multiple way. I am listing some of these scenarios below for better understanding.
- Mix of Stocks in different industries
- Combination of Stocks, Mutual Funds and ETFs
- Combining Stocks with real estate portfolio or real estate based Stocks or ETFs
- Stocks, Bonds, Mutual Funds.
- Mix of Tangible and Non Tangible assets.
- Life cycle based Mutual Funds.
- Commodities based investing.
Seek Professional Advise
If you are not comfortable to assess the potential growth and associated risk yourself, please seek professional help. Professional help is available in various forms that include online research, using robo-advisors, Financial Planners, Wealth Managers and Portfolio Managers. Such help is readily available to almost everyone irrespective of their budget and risk appetites. I highly encourage everyone to explore available resources and evaluate them thoroughly w.r.t. risk exposure and growth potential. Everyone should be encouraged to research before putting their real hard earned $$$ into an investment vehicle.
Keep Savings for Rainy Days & Opportunities
For a successful investing opportunity, it is also advisable to keep some savings aside. Keeping this additional buffer helps to deal with rainy days and unexpected future expenses. Such savings also help to re-invest additional money in the existing investment portfolio to fully utilize the maximum profit.
Common Investment Opportunities
There are so many ways every common man can invest for their long term goals. There are no constraints or defined guidelines for investing besides careful planning and execution. Careful planning includes key factors like investment goals and rewards based on associated risk exposure. I am listing some of the most commonly used investment opportunities used by most people around the globe.
401(K) Based Retirement Plans
Employer sponsored 401(K) based retirement plans are one of the most common investment instrument to majority of us. The retirement plan allows systematic and periodic investments to all eligible employees. In most cases, employers even match contributions in these plans to a certain limit. The contributions in 401(K) are based of pre-tax basis, therefore they also provide tax benefits to contributing individuals.
Real Estate Based Investments
Real Estate is also another good investment vehicle. You can buy home or even a business and rent it to generate rental income. The real estate assets also builds equity over the time. This dual growth potential puts real estate investment very attractive to everyone. Even buying a home for yourself instead of renting helps to build equity towards good investment. However, like any investment portfolio, proper due diligence and risk exposure should be thoroughly studied before investing.
For those who do not have 401(K) available from their employers, IRAs provide a good alternative. The contributions made to the IRAs also provide additional tax benefits to everyone.
Bonds & Index Funds
Adding Bonds and certain Index funds in your stock investment portfolio provide a good balance to create diversified portfolio.
Commodity funds typically invests in raw materials or agricultural products, commonly known as commodity. These funds invest in precious metals such as gold and silver, energy resources such as oil & natural gas, and agricultural goods such as wheat. Such funds provide a good diversification in the investment portfolio when combined with stocks and ETFs.
Cryptocurrencies has also recently gained popularity while exploring for different investment ideas. In recent years, cryptocurrencies have shown tremendous profitable growth for many investors. However because of its highly risky and volatile nature, a detailed risk analysis should be performed before investing in cryptocurrencies.
The list of available investment opportunities around the globe is unlimited. Everyday new opportunities are created and explored by investors worldwide in additional for traditional investment styles. College saving plans, High Yield savings account, NFTs, digital cards trading are few additional investments ideas. Everyone should consider possible opportunities based on their goals and risk based reward expectations.
Few Last words….
As we can see there are endless opportunities for investments. A balanced risks and rewards analysis can help everyone to explore the potentials of long-term gains of their investments. There are also wealth of online information as well as professional help available for making the right investments decision. I truly hope the information in this article will help everyone to understand the basics of investment planning. Good Luck everyone to plan your next investment opportunity and ideas more effectively.
Thank You everyone.