Investment Planning: For Future Consumption

Investment planning is one of the key components of financial planning and it directly affects the outcome of the financial plan. In this article, we will look at the steps involved in investment planning.

Steps of investment planning

1. Meeting the prerequisites

Before we start investment, we should have adequate provision for the basic necessities of life. It is recommended to have at least 3-month emergency fund before starting to invest.

2. Establishing investment objectives

The objectives must be specific, quantifiable and achievable within a time frame. For example, investing for a child’s education fund which is to be used after 18 years or investing to buy a house after five years.

3. Adopting an investment policy

Investment policy is a written plan as to how funds are invested. Without a written plan, we might stray from our strategy and change it without realising. This might derail the plan.

4. Evaluating the investment vehicles

The next step is to evaluate the available investment instruments based on their expected returns and risks. There is a multitude of instruments in the market and we have to shortlist some instruments due to limited resources.

5. Selecting suitable investment

From the shortlisted investment instruments, we have to select the appropriate options for us to invest. The investment objective forms the primary criterion in the process of selection. Other factors include risk tolerance level and age.

6. Constructing a diversified portfolio

After the selection of suitable investment vehicles, we need to ensure that the portfolio is diversified. This is to optimize the returns and risks to achieve the investment objectives. A concentrated portfolio might have a chance of high return with the commensurate higher risk of loss.

7. Review the portfolio.

Once the investment portfolio is completed, it is not the end. We should monitor the portfolio regularly and make adjustments when necessary.

Investment policy statement

Let’s talk a bit about the investment policy statement (IPS). An IPS is a document your advisor should provide that outlines investment goals, objectives and strategies. It serves as a roadmap and helps ensure that investments are made in a manner consistent with your overall financial goals and risk tolerance. Specific information on matters such as asset allocation, risk tolerance, and liquidity requirements are included in an investment policy statement. An IPS should give special attention to describing the investor’s risk/return profile. That includes naming asset classes that should be avoided—as well as those that are preferred.  

IPS provides clarity and focus, establishes consistency and discipline, helps manage investment risk, promotes accountability and monitoring, and facilitates communication and collaboration. It provides guidance for informed decision-making and serves as both a roadmap to successful investing and a bulwark against potential mistakes or misdeeds.

In short, an IPS corresponds to step 3 above. Even if you do not have the service of a financial planner, you should still come up with your own IPS so that you are clear with your goals, objectives, risk tolerance, and time horizon. With this IPS, hopefully it will deter you from taking impulsive decisions that may jeopardise your finances.

How can a financial planner help you?

In investment planning, a financial planner is akin to the doctor. For example, there are a lot of medicines to treat high blood pressure but how do you choose which one is the right for you? For most people, we will go to a doctor and get a prescription. Furthermore, the doctor will monitor your blood pressure and adjust your medication if necessary.

A financial planner will do the same thing. There are a lot of investment instruments in the market with different risk/reward characteristics. Based on your profile, he/she will help to select the investment instruments that suit your needs to form your investment portfolio. The planner’s job does not stop here. He/she will help you to monitor your portfolio and give advice to adjust your portfolio when necessary. Most importantly, your planner will craft your IPS. But you have to ensure that the document takes into account your goals, objectives, risk tolerance, and time horizon.

In short, if you are not the type who like to spend much time in investing matters, it is best to engage a financial planner. It will reduce the time you have to spend on your investment portfolio and might even earn you a higher return.

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Disclaimer: This post is for informational purpose only. You should use judgment and conduct due diligence before taking any action or implementing any plan suggested or recommended in this article.