Investing without a plan is like taking blood without knowing what you want to examine. Or: getting in the car and driving around without knowing where to go. Or: buying random ingredients in the supermarket without knowing what recipe you are going to make. Or: can be done, but may also be doomed to failure. In this article, we’ll give you some tools to get started creating your own investment plan. How do you make an investment plan? So:
How to make an investment plan, the basics
Before we get started, and you are given tools to create a personal investment plan, it is important to understand the basics of investing. What factors ensure that you minimize risk and maximize long-term positive returns? What is the difference between types of stocks, what are ETFs and what is the difference between a bank and a broker? When you understand the basics, making a plan is also easier. Making an investment plan always has to do with your personal situation: how old are you, how long do you want to invest, what risk do you want to take, and what do you sleep well with? The basic knowledge and the personal plan then come together when you start creating your own investment plan. How to create an investment plan is a sum of the following steps:
- Define your goal
- How much return do you want to make (and how much risk are you willing to take)?
- Do you want to invest passively or actively?
- Which approach suits you?
- What investment products do you want to use?
- When do you need your money?
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Define your goal
What is your goal, and how much time (investment horizon) do you have? This is important to know because this is where you adjust your investments. The earlier you start investing, the better. Because: time in market beats timing in market. History teaches that the economy shows both drama and glory, but in the long run it always recovers. The longer you have the time, the less you have to worry about your wealth preservation and returns.
In addition, the earlier you start investing in an ETF on a monthly basis, for example, the more you benefit from interest on interest. Example: If you put 200 euros into an ETF every month, with an average return of 6%, in 15 years you will have assets of 57,662 euros. If you wait another 10 years, then that asset is 135,916 euros. If you are very young and can do this trick for 40 years, you will have a wealth of 383,393 euros at the end of the ride. And it only costs you 200 euros monthly.
Read more about the interest-on-interest effect here
Specifically
Why do you want to invest, what is the financial goal you want to achieve? And how much time do you want to take for this? When you have these two points clear, you know how much money to invest. Write down the amount you want to invest together. Do you need help making this numerically clear or do you want to calculate how much capital you need to have invested in order to retire early? This plan is going to help you.
How much return do you want to make?
And perhaps more importantly, how much are you willing to lose? Return and risk are often like ying and yang. Everyone wants to make returns, that’s the whole idea of investing, but the economy can do strange things, and in doing so, you risk losing money. The higher the return you want to achieve, the higher perhaps the risk you will run with it. Sometimes you can make a lot of money quickly in volatile products, but with these you can also lose a lot of money in a very short time. If you want to minimize your risk, generally your return – your profit – is lower. Thus, with lower returns, you will take longer to reach your financial investment goal.
Also important: don’t count yourself rich! Avoid disappointment. Be realistic.
Handy: apply the rule of 72. This allows you to determine how much return you need to double your wealth within X number of years. The sum is as follows: 72 / required rate of return=number of years to double wealth. Suppose you want to double your assets in 10 years. You need 7.2% return, because 10 * 7.2% = 72.
8% return is a nice historical average that you can possibly calculate with, if you want to invest in the stock market in indextrackers or funds, for example.
Do you want active or passive investing?
Not difficult, but extremely important, so think about it: do you want to sit back and have a good night’s sleep and, above all, not be too concerned with financial news and all sorts of stock market developments? If so, you may be a passive investor. An ETF, for example, is then a good product. Do you think it’s tremendously cool to spend the next few months immersing yourself in investing, in the stock market, doing analysis and charting yourself and your ways? Do you have nerves of steel and no FOMO feelings? A nice stock portfolio may be something for you. Are you driving yourself crazy with the fluctuating stock prices? Perhaps don’t start, but save hard to buy that first apartment for rent.
Decide how much time you want to spend daily/weekly/monthly monitoring your investments, be honest about how you sleep when your investments suddenly drop in value, have clarity on whether you are easily driven crazy by the smell of quickly grabbing hefty pennies, and adjust your choice of investment product and investment party accordingly.
Which approach suits you?
Compare the investment world to the diet industry: it is teeming with gurus and everyone swears by a different approach. But: therefore, what works for one person may not necessarily work for another. Your approach is personal: what fits your investment horizon, desired return, active or passive style, method of analysis, etc.? The number of private investors has increased tremendously in recent years, yes! But the downside of this is that many people got in because they heard a bell ring. With a lot of money in 1 single stock, or buying an ETF at random. This can turn out well, but in general it does not seem wise to us. We want investing to help us become wealthy and we always want to avoid losing money. And investing your money without knowing exactly what you are investing in, and what the underlying asset is, is risky. Do you sleep well on this and can you afford to lose money? Feel free to go! But we will always advocate: do research, create a good plan, take care of financial planning and invest thoughtfully with money you can spare.
What investment products do you want to use?
Of course, this also depends on the questions above. The main/most used investment products are as follows: savings, corporate and/or government bonds, real estate, stocks, mutual funds, ETFs, derivative products (turbos, options, futures), alternative investments (gold, silver, oil, currency, crowdfunding).
Some people will only want to invest in real estate because of their preferences and their beliefs.
Some people will only want shares, again because of their preferences and their beliefs.
Delve into the possibilities. Above all, delve into the risks for each possibility. And delve into yourself. We cannot stress this enough! Because you can have all the ringing wisdom, if you don’t know yourself and act out of emotion, well “hold your horses,” that can go badly wrong.
>> Read more about shares here
Getting started with your investment plan
If all goes well, you now have a rough overview of what you want and how you want to achieve it. However: you have no guarantee of your returns. Investing is uncertain, and risk comes with it. Once you have your goals mapped out, you can build a portfolio. Wise to focus on preserving your assets on the one hand and growing on the other. First rule of investment is not to lose money darlings! It is also very nice if your investments can eventually provide a passive income stream, for example in the form of dividends (stocks, ETFs), interest (bonds) or rent (real estate).
Psst: if you are just starting to delve into investing, this can be very overwhelming. Read the e-book written by Puck where she shares her personal investing story.
