Setting goals gives you long-term vision and short-term motivation, and making a plan helps you keep track of your progress towards those goals and makes you aware of whether you need to make any adjustments to reach those goals.
To create an investment plan, you need to
- Define your goal
$X passive income by age Y.
Required amount: $Z
- Set up a plan to meet that goal
The plan consists of choosing the amount you will put toward the goal each year, working out an asset allocation likely to reach the goal with the minimum risk necessary, and identifying a plan B for the goal in case the returns you’re planning on don’t materialise.
Use the Excel FV function and work backwards to find how much you will need to save each month to reach your goal. If you come out behind, you either need to find a way to earn more, save more, save longer, or live on less in retirement.
- Lay it out in an Investment Policy Statement (IPS)
Investment policy statement
You Need An Investing Plan – The White Coat Investor
Designing Your Portfolio series – The White Coat Investor
Post Your Investment Policy – mrmoneymustache post
Sample investment plan
60k/yr in retirement in 2040.
Using the 4% rule, that requires $1,500,000 in today’s dollars.
Current savings/investments are 150k in super and 200k outside super, so using the Excel FV function, we have a couple of options.
Remember, there are only three variables you can change:
You can choose any 2 of the 3 variables and it will dictate what the last will need to be.
You need to be able to tolerate your asset allocation (AA). If you’re overly aggressive and panic-sell when the market has spent two years steadily dropping to half as you freak out thinking it will never recover, the whole plan goes out the window. At best will mean a lot more years to save, and at worst, it may permanently cripple your ability to ever reach your goal. It is often better to spend a bit longer achieving your goal in a tolerable way than risking your life savings to try and save a year or two of working.
Don’t forget –
Sample Investment Policy Statement (IPS)
My objective is to gain financial independence in my 40’s. I will not withdraw from my portfolio until I have achieved this goal.
My risk tolerance is high. I’m aiming for early financial independence, and a high level of equity exposure will be necessary to sustain this. I’m also relatively young and do not have a fixed date in mind for retirement, so I have time to recover from market volatility.
Fund selection criteria
● All funds must use an index investing strategy.
The above asset allocation within stocks is intended to mitigate the following risks:
When to invest
Invest as soon as money is available, no matter what the market is doing.
This rule is to avoid the behavioural mistake of subconsciously timing the market because market timing doesn’t work.
Buy as soon as money is available regardless of current market conditions.
The only time to not buy as soon as possible is if we have under $3,000, in which case buy as soon as $3,000 is available. This is to minimise brokerage.
I will review my portfolio once per year on December 1st to make sure it is still in line with my goals.
As I approach retirement, I will increase my fixed-interest allocation to 40% and gradually glide back up to 80% equities in the 10 years following retirement. This is known as a “bond tent” or “equity glidepath” strategy and should help mitigate sequence-of-returns risk.
I will rebalance my portfolio using these techniques (in order of preference):
I will save and invest at least 50% of my after-tax, after-super income. I will strive to improve this further over time.
Changes to this document
If I wish to change this document, I must wait at least three months before implementing it. During this time, I must ask for feedback about the proposed changes on the Bogleheads forum. This should prevent me from making hasty/panicked decisions that may have long-term negative consequences.