A plethora of investment plans are available on the internet. For those who wish to invest time or are advanced investors, the CFA Institute offers excellent models. As these are sometimes complicated and more suitable for institutional investors, you will find here a simplified proposal. The “Do It Yourself” investor will need to perform some introspection and answer the basic questions about his or her financial situation before investing. It is recommended to document each evaluation with a few sentences and reference figures.
Try now to reflect on your investment, return and risk objectives by following the bullet points below:
- Describe your overall investment objective: Do you want to supplement your retirement, finance a long-term purchase or achieve financial freedom before you reach old age. Please write it down!
- Describe your investment strategy: If you are investing in equities, it is recommended that you place it in the context of your total assets and document your existing investments (including your apartment / house).
- Indicate the return requirements: Between very positive expectations of 8%, which reflects an historical performance that is difficult to replicate at current price levels, you can take as a reference a return of 6% nominal and 4% after inflation.
- Indicate target asset allocation and risk requirements: An index portfolio allows for adequate risk allocation within an asset class (stocks), but if you move away from a global portfolio, you will have different weights across currencies and regions.
- Define your risk tolerance: Are you willing to lose up to 30% of your portfolio, do you have enough reserves in case of emergency expenses?
- Describe the relevant constraints: Do you have significant expenses that you will need to consider? What are the criteria for asset selection (price, liquidity, domicile)?
- Describe other considerations relevant to the investment strategy: Specify other elements such as your base currency or your maximum number of investments.
- Specify your monitoring parameters: Describe the amounts to be invested, the timing of your investments and the next review of your plan.
It is recommended to do the whole exercise, even you do not fully grasp some questions or if some aspects will not be covered. Take 10 minutes and try to cover as many of the above aspects as possible.
Once the first review is done, compare your answers with the example below and adjust them if necessary:
- Overall investment objective: e.g., Moderate long-term wealth growth.
- Describe your investment strategy: e.g., Current assets of EUR 500,000 in real estate and fixed return. Objective to invest EUR 200’000 in 5 (time horizon), i.e. 40’000 per year.
- Indicate return requirements: e.g., 6% nominal.
- Specify target asset allocation and risk requirements: e.g., 30% EUR, 50% global (USD) and 20% emerging markets.
- Define the investor’s risk tolerance: e.g., 1-year loss limit (worst-case scenario) of 15-18%, conservative profile.
- Describe relevant constraints: e.g., no short-term liquidity needs.
- Describe other considerations relevant to the investment strategy: e.g., base currency is the EURO and the maximum number of investments shall be 3
- Specify monitoring parameters: e.g. 3’000 investments for 12 months, once a month, with a first full review within 12 months.
Once your plan has been developed, you should only modify it if your situation or objectives have changed or if a regular review highlights a real need to adjust it.
An aggressive video on youtube or the so-called good advice of a beginner should not make you change course! However, do not hesitate to exchange your views with a trusted friend.