How to create an investment plan

Do you invest? The fact that you are reading This is Money greatly increases the chance that you do.

What’s less likely is that you have an investment plan.

And by that I mean a clearly defined plan of what you are investing for and how you plan to do it.

Work out your monthly spending from mortgage, to childcare and food shopping

Consider how much risk you are willing to take

Risk is a difficult concept to get your head round when investing. Yet, in reality, we take and calculate risks all the time and so are capable of weighing them up.

Being entirely risk averse isn’t a good thing. You would never learn anything new without taking a risk and sometimes you consider them worth taking in order to achieve your goal, whether that’s getting a new job, visiting a new place or riding a bike.

Some people are more comfortable taking more risk than others, however. And some people can afford to do so, thanks to failure having a lesser impact on them, or other options they may have to fall back on.

Examples of this are that you might have a steady job with a good salary, lots of equity in your home, or a whole life of earning ahead of you. 

Risk needs to be considered alongside your time horizon – the longer you have to get to a set point the less risk you might need to take to get there, similarly if you are racing too quickly to a certain goal you may take on too much risk and be in danger of crashing.

You need to work out where you stand and reflect on your own behaviour and risk appetite.

In its guide to getting an investment plan, Vanguard says: ‘Different types of investments fall all along this risk-reward spectrum. No matter what your goal is, you can find investments that could help you reach your goal without taking on unnecessary risk.’

Work out your investing strategy

Working out your strategy involves combining what you want, how much you have, and the risk you are willing to take to come up with a coherent plan.

Even if you have put in the legwork on the other bits of the investment plan, this is likely to be where you come unstuck.

That’s because it would be very easy here to get bogged down in the ‘what am I actually going to invest in’ element of planning.

However, that isn’t what you are doing here. This strategy part of the simple investment plan is about working out how you will use the money you have, to get to where you want to be, by taking as little risk as possible.

You can leave picking individual funds, investment trusts, shares or ETFs to another day.

This is the part where you think about whether you will be investing a lump sum or regularly, or a mix of both. 

You need to consider how often your regular investments will be and how you will automate this as much as possible, so as to avoid failing to make them yourself.

Your strategy should include an idea of whether you will keep investing through slumps in the market and some reading on why this may be a good idea. 

There is an alternative route but it involves working out a system to decide when to get in or out and perfecting market timing – something investors find notoriously difficult to get right, with behavioural studies showing we tend to sell low and buy high.

The strategy should also involve a consideration of asset allocation and how much you need to hold in safer low-risk assets, such as cash, or bonds, versus what you hold in higher risk but potentially higher reward assets, such as shares.

You should do some thinking about active or passive investment here and whether to choose one or a mix of both, you should also think about tax-friendly investing in an Isa or Sipp – and which may be better for different pots of money.

You also need to do some thinking about investment costs (something that unlike performance you can control) and where you invest. Read our guide to the best DIY investing platforms to get some ideas.

Make sure your strategy suits you – otherwise you probably won’t stick to it.

In his book The Best Investment Writing, Meb Faber includes a piece from investor Todd Tresidder, Five must-ask due diligence questions before making any investment.

He writes: ‘Investment success is a lifelong process, and humans aren’t robots. The only way you’ll stay the course long enough to succeed is when your investment strategy fits your interests, skills, goals and resources, thus providing emotional satisfaction.

‘There are many ways to make money investing, but I recommend you find the one or two that are going to work for you, and not get diverted by all the rest. You must stay the course long term until you succeed.’ 

What next?

Once you have got this all down on a piece of paper, you can then start thinking about the actual investments that will get you there.

That is a topic for another article – and one that we cover regularly on our Investing, DIY Investing and Index Investing channels – but with your investment plan sketched out, even if it isn’t in great detail, you will have a better idea of how to work out if those investments fit you.

I’d also recommend doing some further reading. Some good well-written and straight-forward UK-focussed books on investing are:

Andy Bell, The DIY Investor

Mark Dampier, Effective Investing

Lars Kroijer, Investing Demystified (A good read for passive investing)

You should also read around some of the more thoughtful investing websites, a personal favourite of mine is the Monevator blog.

Some other This is Money resources that you may find helpful are our regular Investing Show videos, our 50 best funds round-up, and our free How to be a Successful Investor guide.