Investment Planning

What is investment planning?

Most private clients understand the process and procedures behind investment planning. Still other novices or beginner investors don’t grasp the concept of what investment planning truly is. So just “what is investment planning”?

Investment planning is the process of matching your financial goals and objectives with your investment resources. It’s critical to note that investment planning IS A SUBSET OF financial planning. Good investment planning cannot be done without a great financial plan first!

Investing your money takes a great deal of time, tools and resources. Much of the time, tools and resources are required because financial planning must come first.

- Without a financial plan you don’t have well structured financial goals.

- Without well structured financial goals you won’t have well defined investment objectives.

- Without well defined investment objectives – how can you invest successfully?

The key is you need to understand what you’re trying to accomplish prior to investing a dime. If your financial goals are modest why would you invest aggressively if you don’t need to? If your financial goals are extravagant you may not be able to achieve your goals without an aggressive investment plan.

Investors often wonder “what is investment planning” without asking the question “what is financial planning” first. This can lead to disaster. I place such a high priority on financial planning for every investor because without knowing where you want to end up how can you chart a path to get there?

Assuming you do have well defined financial goals, you now can chart a path to reach them. The what is investment planning question becomes more simple to answer.

We define investment planning as creating a clear cut path to achieve your financial goals. Your financial goals hinge on reaching your investment objectives.

For example, If your financial goals include retiring with a Rs 50,000 per month income when you’re 60 years old, and dying broke at age 90 because you want to enjoy your assets – you need to start by saving Rs 5,000 per month at age 30.

Saving Rs 5,000 per month at age 30 will create a Rs 1.01 Crore portfolio value at age 60 (assuming an 8% rate of return, not including fees, taxes or inflation factors). That same Rs 1.01 Crore (if it continues earning an 8% rate of return) will be able to generate about Rs 50,000 per month in income for 30 years until it reaches a zero balance.

That is investment planning! It’s understanding where you want to be and figuring out what it will take to get there.

The path you’ll create to earn that 8% per year return is also part of investment planning. For example, for about the last 40 years a moderate portfolio of 60% stocks and 40% bonds would have earned a bit over 9% per year. Take away fees and trading costs etc. and you’re left roughly in the 8% per year range. Now you have a handle on where to start your investment planning quest – a basic moderate 60% stock and 40% bond portfolio.

But investment planning is more than that. In the example above the financial goal is retirement at age 60 with a retirement income of Rs 50,000 per month for 30 years. The investment objective therefore is to earn an 8% annual return. Investment planning however is also:

-What investments should I own to average 8% per year

- What asset allocation model is best to average 8% per year

- What types of investments (individual stocks, bonds, mutual funds etc.) should I own to average 8% per year

- What criteria for adding these investments should I follow to average an 8% return per year

- What portfolio strategy should I use to average 8% per year

- How often should I monitor and rebalance my portfolio to average 8% per year

- And on and on…

There are many aspects of investment planning. Investment planning – as a term – can be described as simply as the process of defining your investment objectives (which are a function of your financial goals) and creating the most low cost efficient path to reach those investment objectives.

Investment planning is a process – not a one-time event. It’s a lifelong endeavor that will have twists and turns and knock you on your head once in a while. But if your investment plan is built on a solid financial planning foundation, you’ll be prepared to weather the storms which invariably will come your way!