How To Build Your Personalized Investment Plan

In this article, I discuss the beginnings of the investment process. Selecting securities isn’t the first thing investors do; choosing investments is just one of many elements in the process.

The following checklist outlines how you can build a successful investment plan that meets your individual needs and goals:

Setting realistic expectations When you start your investment program, don’t expect to become a millionaire overnight. History has shown that the market has many ups and downs. However, when looking at the long term (five years or more), investors have been rewarded for their patience. Additionally, riskier investments held over the long term provide higher rewards than low-risk investments. As you can see from the following statistics, less risk equals less return. For example, the 73-year average annual return (1926 to 1998) for U.S. Treasury bills was 5.7 percent, the return for long-term corporate bonds was 5.7 percent, and the return on the S&P 500 Index was 11.2 percent.

Determine where you stand. Gain a good understanding of what your financial commitments are now and in the future. Make certain that you have an emergency fund and a savings plan.

Clearly state your financial goals. How much do you need? When do you need it? How much risk can you tolerate? If you lost the principal of an investment, could you mentally recover and invest again?

Determine the appropriate allocation of your personal assets for your age (young adult, middle-aged, retiree, and so on). Develop a regular investing program and stick to it regardless of market volatility.

Select the investments that meet your financial goals and risk-tolerance level. How much time do you have (in years) to invest? Should you be an active trader and invest often during the day or a passive investor with a buy-and-hold policy? (See Article 4 for details on answering such questions.)

Analyze your investment candidates. Before you call your online broker, make certain that you can tell a child in two minutes or less why you want to own a particular investment. Determine how long you plan to hold the security and decide at what price you will sell (and take your profits or cut your losses).

Select an online broker that suits your needs. Avoid mutual fund loads (a sales charge added to the purchase or sale of a mutual fund) and high fees. Use automatic investment plans, dividend reinvestment programs, investment clubs, and other programs to reduce brokerage commissions. (See Article 7 for more information.)

Monitor your portfolio and reevaluate your goals on a regular basis. Rank the performance of your investments and make the appropriate changes. You can expect that changes in general market conditions, new products that are introduced, and new technology will change how established businesses operate. Use this information to gain an understanding of when to hold and when to fold. For more information about the investment process and bulletproofing your portfolio, check out Investor Home at www.investorhome.com/toc.htm.