Investment Plan

Ricardo Ribeiro, PRM

In plain terms, a successful investment plan is one that meets your objectives, but it must also be one that you can execute.

After all, how good is the "best" investment plan if you cannot follow it?

Why You Need an Investment Plan

Let's pretend you have just bought some stocks with part of your savings.

It seemed the right thing to do with your money...

But the unexpected happened.

The stock market started falling... it is about 3% down.

We Have to Make an Effort to Put Things in Perspective

Nobody likes to lose 3%, it is a lot of money. But if we look back to the last few years, we can find much worse down moves.

It also fully recovered from those lows...

In other words, although the current down move looks terrible, it was not the worst.

But still…

Will the Stock Market Continue Falling?

Right, it is still down... what will happen next?

This is a valid question. However, it is also a tricky question.

I will explain it.

This seems a natural question to ask, but it only makes sense in some cases.

For example, a long-term investor should not really care about the day-to-day developments.

Therefore, I will ask a better question:

Did This Move Scare You?

I mean, if you got scared, then you probably got emotional about it.

To use your "emotions as an indicator" is an excellent and smart thing to do.

However, there is also the risk of letting your emotions take over and influence your actions. That would be a terrible thing.

This leads us to your method or system.

Wait... You Have a System or Methodology… Right?

Your system or methodology should have some rules or guidelines to help you handle such down moves.

The reasons are quite simple:

  • Rules and guidelines usually are created with a cool head, away from the market hours. Therefore, they tend to be more objective.
  • They give you a script to follow in the "heat" of such moves.

But... Will the Stock Market Continue Falling or Not?

I did not say, because I have no idea. Nobody has.

But it does not really matter, as long as you have (and follow) a system or methodology.

Well, I know that no system works 100% of the time. I also know that market conditions change, making previously profitable systems obsolete.

But the thing is:

You are much better off with a system or methodology.

Meaning That...

In such events, keep following your own investing rules and guidelines.

Also, review your plan from time to time, because it might become obsolete at some point in time.

But it is essential to review your plan out of market hours and try to be as objective as possible.

I finish the example with a recommendation of sorts:

Think carefully before making decisions based on your emotional reaction to market events.


Let's start with the investment objectives...

Return Objectives

Everybody would like to achieve the best possible investment return, but that is too open to be a goal. You need to specify in detail what you want.

Even stuff like "I want to beat the stock market" is not detailed enough. For instance, it does not specify the time horizon. It also does not clarify which stock market index you meant.

Mainly, I like investment objectives that are relative to the inflation rate. For example, 2% or 3% per year above the consumer price index on average over every 5 or 10 years (rolling periods).

One of your goals should be, at least, to make your money grow faster than inflation.

If you are investing for retirement, then you might need to adjust your targets. You want to generate income, but you should also protect your investments (wealth preservation).

However, don't forget that your desired return must be realistic.

Risk Objectives

People would prefer not to take any risk, but that is not possible. Even the safest investment involves some risk. Usually, you need to take higher risks if you want to produce higher returns.

I like risk objectives related to volatility. For example, to try to keep the portfolio volatility under 10% or 15%.

However, simple stuff also works. For example, some people are happy with a rule like "I do not want my portfolio to fall more than 20% from its previous peak."

As a warning, a common mistake is to "overestimate" the risk tolerance. In other words, people believe they can handle their portfolio's risk level when they can not.

You need to calibrate your portfolio to a risk level you are willing and able to accept. You also have to balance your return and risk objectives. They go hand in hand.

Now let's take a look at the investment constraints...

Time Horizon

Are you investing for the long term? During a crisis, can you hold on to your portfolio?

Your answers to such questions will shape your risk and return objectives. Again, it is all related. They must fit together.

Until you become a competent investor, better to avoid short term strategies.

Tax Situation

While building your investment plan, you need to consider your tax situation. Your tax situation is very relevant because, in the end, what matters is your after-tax performance.

You should consult a tax expert to get personalized advice.

To illustrate, I want to mention that different investment vehicles might follow quite different tax rules. Your capital gains tax rate may be different from your investment income tax rate. And so on.

On a more practical example, let's say inflation is 2%, and your tax bracket is 20%. Your portfolio's return must be higher than 2.5% if you want to do better than inflation (after-tax, using simple calculations).

Liquidity and Other Constraints

In general terms, the more liquidity you need, the less risk you can take. You also need to consider any legal restrictions and personal constraints.

Risk objectives and investment constraints are essential and should not be ignored.

Now that we have the objectives and constraints, we can start to put a strategy together...

Strategic Portfolio

Your strategic portfolio must meet your objectives and constraints. It must all fit together, and it must be something that fits your personality.

Typically, it is a passive portfolio.

In other words, you have to determine which assets (or asset classes) to add to your portfolio. You also need to decide how much (as a percentage of your portfolio) to invest in each of them.

You can invest directly or through funds. Unless you are an expert, investing in real estate via funds (or REITs) is often the best option. Depending on your situation, the cash part can even be held at savings accounts.

Also, taking debt to invest is usually a bad idea. It is best to avoid that. Save first, then add to your investments.

Then, the asset selection remains fixed.

Your portfolio should be constructed to achieve your risk and return objectives over your desired time horizon. It must also meet your other constraints.

Tactical Changes

Sometimes, short-term situations bring excellent investment opportunities. To be able to profit from them, you need some rules specifying how to proceed in such cases. That is your tactical strategy.

Your tactical changes are temporary deviations from your strategic portfolio.

In other words, your portfolio should be following your strategic allocation until some short-term situation brings a tactical opportunity.

Then you change your portfolio aiming to profit from such opportunity. Once it is over, you change your portfolio back to your strategic allocation.

Note that you can only change your portfolio according to your own pre-defined tactical rules. There should be no spur-of-the-moment decisions here.

We will talk more about strategies in another article.


How would you know if something is out of line if you are no looking?

Monitoring is an essential part of any investment plan. You have to track not only your performance but also your execution.

Performance tracking is about checking if your returns and risks are in line with your plan.

Execution monitoring is about two things. You should track if you are getting the best possible price every time you make a transaction. Moreover, it is also essential to check if you are following your plan.

Rounding up...

Investment Policy Statement (IPS)

Investment Policy Statement is a fancy name. Still, the idea is simple: put it all together in a single document so you can refer back to it regularly.

You have made lots of decisions to get to this point. Are you going to remember everything in a few months? What about in a few years?

So, better get everything in writing, but don't forget it in some folder. Keep it at hand and review it from time to time.

This IPS can also help you in case you decide to hand over your investment accounts to an investment adviser (or to a new adviser if you already use one). All your new adviser has to do is to follow your plan. It should be all there.

One last important thing, you should revisit your plan from time to time and, above all, if your unique situation changes.

An IPS does not feel like a beginners' material, but it is essential.

Please document everything. You will eventually need it.


We do not provide financial advice, and nothing in this article should be construed as advice. The contents of this article are presented ‘as is’ and on an educational and informational basis only. You are advised to consult your financial adviser before using, in any way, the information presented here. We disclaim all liability in relation to this article and the contents of this article to the maximum extent permitted by applicable law. Please read the full disclaimer.

Not Yet Using Upbias Mentor?

Learn to invest by doing, without risking your money.