7 Steps To Build Your Investment Plan

7 Steps To Build Your Investment Plan

Shawn Yap AEPP® ChFC®/S CFP® SAMP™

Financial Advisory Director, SingCapital Pte Ltd

This article is contributed by SingCapital

Making a successful investment can be simple and straightforward, yet the process can be complicated to begin. The following 7 steps may be useful in making the investing journey appear less daunting for the layman, while possibly granting a good rate of return over a period of time.

Step 1: Purpose

In the 7 Habits of Highly Effective People, author Stephen Covey said, “Begin with the end in mind.” You need to be clear on your investment objective. Why are you investing? Do not invest because your friends are doing it. Having a clear purpose for your investment journey would ensure your commitment to stick with the remaining steps ahead. Simply hoping to achieve a higher interest rate than the bank may be too general and far from what a smart goal should be, which calls for specificity. Is this to park a portion of your emergency fund? Or for the down payment to purchase a car or property? Is this meant to fund your children’s education? Or is this your retirement nest egg? You would likely have many goals you wish to achieve with your investment. Thus, it is important to understand your wants and needs before allocating your resources and budget.

Step 2: Experience

Both direct and indirect exposure to investments can be equally beneficial and detrimental to your investment decision. If you have made money in the past, you may suffer from Confirmation Bias and assumed that you will always make money. If you have lost money in the past, you may suffer from Loss Aversion where you fear even the word, “invest”. Every experience is a good opportunity to learn the reasons behind every profit and loss as you accumulate wisdom along the way. Look at both sides objectively and find lessons in them. There are no bad investments, only bad investors.

Step 3: Risk Profile

While this is a very important tool to assess your risk appetite and tolerance, it cannot be the only thing you rely on when investing. Some of these assessments tend to be skewed towards certain categories. More often than not, young investors will almost always fall under a higher risk category simply because of age and a supposedly longer investment time horizon, even with the absence of investment experience. Therefore, you need to have a deeper conversation with your financial planner on the past performance of the investment, especially in a market downturn, to determine its true characteristics. Another acid test is to ask yourself how large a negative return can you accept, and for how long can you psychologically endure that. To cite an example, a globally diversified 100% equity portfolio can drop as much as 50% and stay in negative territory for several years in a major economic crisis.

Step 4: Empower

Further your interest in investment by taking courses conducted by reputable and regulated entities like SGX. Avoid courses touted to make you rich or seminars that promote unregulated investments. Alternatively, engage a good financial planner to educate and coach you. Find out the common pitfalls of investors, especially for beginners. Although prudent investing does not give you a 100% sure-win experience, being prepared for different market conditions would support you in the long run.

Step 5: Framework

This is the step that most investors often miss. Some portfolios appear scattered, while some are too concentrated. Some may even be exposed to unnecessary risks. It is said that when one “takes care of the risk first, the returns will take care of itself.” An “aggressive” investor may focus too much on the potential return and forget about the risk. Meanwhile, a “conservative” investor may avoid risk altogether. By managing the risk characteristics of an investment portfolio through a framework, you can achieve the highest possible return with the lowest possible risk. Wealth management organisations like Temasek and the Government of Singapore Investment Corporation (GIC) have their own investment framework, and it is a good idea for you to have one of your own. An example is the asset allocation framework, which is a process of diversifying your investments into different asset classes and geographies.

Step 6: Strategies

This is also something that most investors are unclear of. What do you intend to do if your investment were to drop by 10%, 20% or even 50%? Do you buy, hold or sell? These simple actions can result in a huge impact on your portfolio. Professional traders have a trading plan to guide their trading decisions. As an investor, you or at least your financial planner should also have an investment mandate that will help you make sound investment decisions at critical junctures of your investment journey. In addition, there is also a difference between investing a lump sum from your current resources, and a yearly or monthly sum from your regular savings. Some strategies like dollar cost averaging works well for regular savings invested in diversified portfolios over a longer term, but may not work as well for individual stock counters.

Step 7: Product

It may come as a surprise to many that looking at products comes last when building an investment plan. Investors tend to try and look for the best miracle product without going through the first 6 steps, and the success of such a move is often unpredictable. The investment products that we eventually choose are meant to fit into our investment and personal profiles ——not the other way around—— and this is where those steps can provide the clarity we need to select the most suitable product.

7 Steps to Build Your Investment Plan

Contact SingCapital to find out how you can take charge of your financial planning journey.