Importance Of Investment Planning

Investment Planning

Overview

It is an important part of any financial planning process. It entails the use of the earnings of an individual to buy assets that would give him or her future benefits in the form of dividends, capital appreciation, interest earnings and or capital gains. These are usually undertaken so that people can earn money sufficient for large purchases or have enough to spend for life events such as buying a car, a new house or marriage. It could also include objectives such as starting a business, saving for retirement and paying for the education expenses of themselves or their children.

What constitutes investment planning?

Achieving these goals requires projecting what they will cost, and when one would need to withdraw

By correctly identifying these factors at the start of any investment planning process, and reaffirming and adjusting them through time, he or she can make the most of the plan. The individual needs to ensure that the investment strategy is designed and subsequently managed in a manner that reflects his or her desires and comfort level.

The first step is to establish an individual’s overall investment objective. This would take into account the overall aims of the individual in life, including their goals, income needs, time horizon and personal preferences. Next, the investor would need to figure out how much a person would like to invest to attain the above objective. After that, an individual needs to decide upon the optimum and maximum level of risk he or she is willing to tolerate based on their risk appetite. Investment objectives are usually one of the following four types:

 Capital Preservation – This objective is appropriate if the individual has a short time horizon and is not willing to tolerate much fluctuation in the principal value of their investments. This objective trades-off long-term performance for short-term safety. Portfolios managed to this objective commonly include U.S. treasury bills, money market funds, certificates of deposit, and high quality bonds maturing in no more than 24 months.

To achieve the Capital Appreciation objective, the funds are primarily or exclusively invested in a diversified equity portfolio and equity-based mutual funds without regard to current income. The objective of attaining the objective of Capital Appreciation is further facilitated by reinvesting what income is generated by the portfolio and limiting withdrawals during adverse market conditions. If the individuals risk tolerance is a little conservative than most who opt for this portfolio, funds may also be invested in money market funds, certificates of deposit, high-quality bonds of one to fifteen years in maturity, inflation-protected bonds, and high-yield bond funds to smoothen out some of the fluctuations of the equity