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Know How to Prepare a Personal Investment Plan and Understand Its Importance

The most important financial-planning document you will prepare, besides your list of personal and family goals, is your investment plan. In finance terms, your investment plan is also known as your investment policy statement. An investment plan is important because it creates a framework for every investment activity in which you will participate. It states what you will invest in, how you will invest, why you will invest, what percentage of your money you will invest, and so on. In short, your investment plan significantly affects your investment returns. Write this plan well and then follow it carefully. An example of a good investment plan is found in the Learning Tools directory of this website under Learning Tool 5A: An Investment Plan Example.

Your investment plan is a detailed description of all the major components of your investment strategy. It will help you to do the following:

  1. Represent yourself. It explains your personal investment characteristics, such as your risk tolerance and your personal constraints, and how those relate to your asset allocation and targets.
  2. Articulate what you will and will not do. This plan clearly states what you will and will not invest in and how you will invest, and also includes investment guidelines that will help you invest your money wisely and achieve your goals.
  3. Provide an investment framework and guidelines for making wise investment choices. If you clearly think through and plan how you will invest now that you have few assets (and are not influenced by "fear and greed"), it will give you an investment framework and guidelines to help you reason through decisions which could have a major impact on future financial goals and retirement. If followed carefully, it will help you avoid poor investment decisions that could have major repercussions for your financial life, but only if you follow the plan.

Your investment plan is divided into four separate categories:

  1. Risk and return objectives
  2. Investment guidelines and constraints
  3. Investment policy
  4. Portfolio monitoring, reevaluation, and rebalancing

Each of these categories is discussed in detail in the following paragraphs.


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