Investment Plan

Revised by Ricardo Ribeiro

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?

Please read the disclaimer at the end of this article.

How to Make an Investment Plan

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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 specify which stock market index you meant.

Particularly, 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).

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. Normally, 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.

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 a few possible cases. Different investment vehicles might follow 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 not something you find very often. However, they are very important and should not be ignored.

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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.

Normally, it is a passive portfolio.

In other words, you have to decide 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.

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 good 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.

Investment Policy Statement (IPS)

Investment Policy Statement is a fancy name, but 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 investments 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.

I am sure an IPS does not feel like an Investing for Beginners' material... but it is essential. Please document everything. You will eventually need it.


We do not provide financial advice, and nothing in this investing for beginners guide should be construed as advice. The contents of this guide 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. To the maximum extent permitted by applicable law, we disclaim all liability in relation to this guide and the contents of this guide.

Please read our full disclaimer for more information.