Steps to Develop an Investment Plan

Planning your investment is how you can succeed in growing your money. Investment should not be made randomly, but you need to develop a plan which clearly defines your investment goals, capital you will use for investment, risk appetite, and timeframe to achieve your investment goals.

1. Set an Investment Objective:

Firstly, have a clear and precise understanding of your investment objective. This investment objective should be formulated after considering several factors, such as your income growth rate, current expenditure, and retirement goals. You also need to think about your risk appetite before developing an investment objective.

2. Review Your Finances:

Before making any investment in Australia, you need to know where to start. Review your current financial situation. Investments come with a risk factor, which is why you need to create several layers of funds first before you put your money in the market. It would help to prioritize repaying debt, contributing to super, and making an emergency fund. This will give you a clear idea of how ready you are to start investing and how many assets you can allocate for the same every month.

3. Set Your Financial Goals:

Writing down your financial goals will help determine how aggressive your investment plan needs to be. Include how much you plan to invest every month and how long you have to reach it. Create a short-term plan, medium-term, and long-term plan. This will help pick the right investment opportunities that will help you reach your goals based on the investment plan.

4. Determine Asset Allocation:

Asset allocation refers to how your portfolio is divided between different asset classes. Dividing your money to invest in a similar market is not the right way to go ahead. Instead, create a balanced asset that includes a variety of asset classes and markets to manage risk powerfully. This is because different markets behave differently, which means your risk substantially decreases. If the bond market is not doing well, the equity market may be strengthened, which will balance out the risk factor for you. This is why you have to plan how you wish to allocate your asset to diversify the portfolio and reduce risks beforehand.

5. Understand Investment Risks:

Every investment has some investment risk attached to it. It can be small or big based on the risk you have agreed to take. There is a possibility that your investment may fail or not perform how you expect it to. All assets carry some investment risks, and some are riskier than others.

Risks that can affect your investment include the following:

1. Market Risk:

This is the investment failure due to economic changes that can affect the entire market, just like the 2019 pandemic that affected the global market.

2. Interest Rate Risk:

This is prone to happen if you have invested in fixed interest investments. The fixed interest rate reduces your returns and causes you to lose money.

3. Liquidity Risk:

This is a financial risk where, for a certain period, you cannot sell your investment quickly enough without impacting the market price.

4. Sector Risk:

This risk is associated with investment failure when a specific sector of industries gets affected due to an event.

5. Credit Risk:

This is a possibility where the company or government you have blended to fail in repaying the loan and defaults on debt. This is a risk where the lender may not receive the owned principle and the interest attached along with it, which disrupts the cash flow and increases the costs of collection.

6. Currency Risk:

This is a form of risk that can happen when unfavorable moves in exchange rates happen. If you have not done diversified investments, it may significantly affect your portfolio.

7. Concentration Risk:

Relying on a single or similar sector investment is a huge risk as there is a possibility it may perform well. Due to lack of diversification and poor performance of one investment or asset class, your portfolio may be significantly affected.

8. Timing Risk:

When an investor speculates the best time to buy or sell stocks based on future price predictions but potentially can miss out on beneficial movements in price, which is caused due to an error in timing which results in loss of capital.

9. Inflation Risk:

When your investment value does not keep up with inflation, the profit you are gaining is not enough to grow your capital.

10. Gearing Risk:

When you used borrowed money to invest, it further magnifies your losses as your investment value may fall, but you still have to repay back the loan balance along with the added interest.

6. Know Your Risk Appetite:

Your appetite for risk depends on how much you can afford to lose and how much time you have to reach your investment goal. If you are young, you have several years to recover from financial losses and achieve your goals. For people nearing retirement, taking higher risks makes no sense, as risking your money now when the recovery time is less may result in a decrease in capital. Be prepared to incur loss and think about how you can handle it. If you are ok to take higher risks and confident you can deal with them, you should go for larger risks. Because larger profit can be gained only through larger risks. If you are a safe player, choose low-risk investments instead.

Each investor’s risk tolerance is different and they have different financial goals. Understand the level of risk you are willing to take before making your investment plans. Do diversify your portfolio based on the level of risk so that even if you lose somewhere, a part of your capital will be safer with your low-risk investments.

7. Diversify Asset Allocation:

Diversifying your asset across different stocks and bonds will help to protect your capital. Some of the stocks may be underperforming, but that will not affect your entire portfolio. Asset allocation should be done cautiously where you can get aggressive in few investments and keep it safe in few others.

8. Decide Your Investments Options:

Determine the type of investments you will allow yourself to make and the ones you would stay away from. There are different investment options you need to look into. You can revisit your investment plan from time to time to adjust your investments according to the market change and your risk appetite.

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