After determining your financial goals and risks, the next step to managing your portfolio is to create a financial plan. While many of us would like our hands held throughout this process, understanding the steps and outcomes of your investment decisions is clearly a must.
What are the factors that come into play when determining a financial plan? They vary by liquidity needs; time-horizon; asset allocation; risk-type; income stream and amount we can set aside to invest. For instance, an individual’s financial goals would be to set aside money for their child’s education and their own retirement. Their plan, however, could be to invest a portion of their savings in both retirement and educational investment vehicles. Furthermore, this plan would have a time-frame for when their investments must begin to be accessed.
Without an investment plan, our investment goals would never come to fruition. We must have a clear idea of how to invest our money, for how long, in what investment vehicles, and the risk we want our portfolio to carry. Not having a properly laid out plan can put a serious damper into our short and long-term goals if our plans are conducted in haste without realistic expectations and set targets.
It is also quite easy to be over-ambitious with our investments and stretch ourselves too thin. Covering short-term costs and emergencies are important as you might be incurring unnecessary costs by dipping into your retirement investment vehicles to cover immediate expenditures like a mortgage, tuition, vacation or even unplanned medical expenses.
There is the additional concern of not being cognizant of the type of risks you might need to endure to reach your short-term and long-term goals. This is especially the case if you want to continue the lifestyle you had when employed. Thus, the issue of investing too little and being too cautious is of concern.
However, the over-arching reason for constructing a financial plan is to stick to it. Managing your finances emotionally can be the single greatest threat to your savings. Understanding and clarifying the gap of what you expect and how and when it will happen will limit the stress and uncertainty surrounding the management of your portfolio.