—  PLAN  —

Before you start your investing journey, you need a plan.  

By going it the do-it-yourself route, that doesn’t mean you should ignore the best practices of investment advisors. The above three steps describe the Planning stage of the Investment Management Process. Like cutting a piece of wood, you should measure twice and cut once; otherwise, much like wasting time and material, you’ll have wasted valuable time and money with poor investment choices which do not accomplish your investment objectives. 

—  DETERMINE OBJECTIVES AND CONSTRAINTS—

Get your notebook ready - your investment journey begins here.

The first step in the Investment Management Process is to determine your own investment objectives and constraints. In Portfolio Management, investment objectives are described as both return and risk objectives. In an advisory setting, they are usually determined through both standardized questionnaires and conversations with your advisor, however there is no reason you cannot do this yourself. Begin by viewing the sample questionnaire below and create more value by having an honest conversation with your family members, friends and other trusted persons. A plan developed without the advice and input of others is likely to be flawed.

—  CREATE AN INVESTMENT POLICY STATEMENT—

You’re your own investment advisor. You need a mission statement.

The second step in the Investment Management Process is creating your own investment policy statement (IPS). Because you are advising yourself, you should try and make this document as formal as possible. Lay out what kinds of investments you’d like to be involved with (stocks, bonds), whether or not you’re going to be an active investor or would prefer to passively take market returns, your own investment style (e.g. large-cap dividend investing for equities, investment-grade securities for bonds), and any types of investments that are strictly off limits. Try and be a bit flexible with your asset allocations, such as setting acceptable allocation ranges for each asset class, but not too flexible - you don’t want to put yourself in a position where you’re too exposed to any particular asset class.

See an example of a basic Investment Policy Statement by clicking on the button below. Use this as a framework to ensure you’re on the right path.

—  DETERMINE STRATEGIC ASSET ALLOCATION—

Stocks, bonds and cash. How much of each?

Many people choose to invest only in stocks and bonds while having a small amount of cash on hand for good opportunities. As your own investment advisor, you must make the decision for how best to deploy your capital. How much of it is in riskier equities (stocks) versus lower risk, lower return fixed-income (bond) securities? These aren’t the only asset classes available to you, however. Investors today have access to a wide variety of alternative investments such as commodities and real estate.

Take the time here to study up on the long-term historical risks and returns by asset class, as these will be direct inputs into the investment plan you’re making. After all, a plan which isn’t expected to achieve your goals isn’t much of a plan at all. Click the button below to see some interesting data on how each asset class has performed in the last twenty years.