Feeling shell shocked? You aren’t alone. After the great collapse of the stock market in 2008 and early 2009, most investors are looking for a way to rebuild their assets. Unfortunately, many people are so shaken by the losses they’ve incurred that they don’t know how to invest now without taking more risk than they can stomach. Some have sworn off investing entirely, vowing to stay in cash and CDs. Others feel like they have missed the rebound in stocks, so now they are just…waiting. More than a few are questioning the whole concept of investing, after the “lost decade” that they have just been through.
Don’t feel bad if any or all of these describe you. This has been a treacherous period for almost all investors. Retirement savings, including 401(k)s and IRA rollovers were cut nearly in half for many investors across the country, although they have rebounded somewhat since March.
A good investment plan is as important to your financial success as a good map is when you’re traveling in an unfamiliar part of the world. You wouldn’t fly to Sydney, Australia, rent a car, and then set out driving across the continent to Perth without a roadmap—would you? You might end up chasing kangaroos in a rainforest.
Just like a roadmap, a good investment plan identifies your destination (your investment goal), where you are now, and the best road to take to get from here to there. Of course, a roadmap can’t forecast all the problems you might encounter along the way—heavy rain storms, a section of the highway that’s closed, or a flat tire. But it can help you adjust, deal with those problems when they come, and then continue along in the right direction to reach your intended destination.
Simple, right? But what does a good investment plan have in it? The answer is that it has everything that is important and relevant to reaching your goal. The essential elements include:
- A clear statement of your investment objectives. These are the tangible reasons you are investing—the amount of inflation-adjusted income you’ll need when you retire, paying for your children to go to college, or buying a vacation home in North Carolina.
- An evaluation of your current assets—individual stocks, mutual funds, CDs, municipal bonds, 401(k), IRAs, and any other assets, as well as your debts. This is the starting point.
- An assessment of how much you’ll be able to save and invest, as well as any other sources of income or lump sum payments you expect.
- A realistic assessment of risk—including identifying current weaknesses in your portfolio, the risk of loss from investing, future inflation, debt risk, and the risk of running out of money when you retire. They can’t all be neatly quantified or eliminated, but you can work to prepare for them.
- A target for asset allocation (% to invest in stocks vs. bonds, CDs, and cash). This depends on a lot of things—your age, when you want to retire, how far short of your goals you are now, your “go to sleep at night” factor, and some consideration of where the markets are now.
- A diversification plan for your growth assets (across large cap, mid cap, and small cap U.S. stocks, as well international and emerging markets stocks).
- A preservation plan for your bonds and CDs, which takes into account potential changes in inflation and interest rates, credit risk, and your tax bracket, and includes a policy of laddering bond maturities from short to long.
- Investment guidelines for what to do in good and bad market conditions—such as when stocks go up substantially, or enter a sustained downturn, or when interest rate changes affect bond prices.
- A specific plan to reduce or eliminate debt.
It should be clearly written (yes, written down on paper), designed specifically for your needs, and should not be built on somebody’s forecasts of future market performance.
Do you have a good investment plan that is designed just for your needs? Your future is too important to you to avoid this first step. If you need to rebuild after the market decline of 2008, do so on solid ground—starting with a good plan.
Next in the “Rebuild your Wealth on Solid Ground” series (Part 2 of 4):
Stocks vs. Bonds and Cash: How Much Should You Have?
