How to Create a Successful Investment Plan in 5 Steps

Updated: October 4, 2023


In this article, I will show you how to create a successful investment plan in 5 steps. All serious investors should develop an investment plan to meet their long-term investing goals prior to deploying significant amounts of capital in any investable market. Becoming a successful investor requires establishing an investment plan and then sticking with it over the long-term, which is surprisingly overlooked by many investors. Therefore, establishing an investment plan is incredibly important, alongside understanding the factors that can help contribute or factor into your investment plan's success.

Step #1: Assess Your Current Financial Situation

Before you even consider investing in the markets, the first step is to assess your current financial situation to see whether it's even viable for you to begin investing. To begin, you should create a budget to understand how much money you have to invest and how much you could automatically deploy every month. Afterwards, you should ensure that you've met the basic investment prerequisites below before deploying significant amounts of capital into the markets:

  • Have An Emergency Fund: In cases of unexpected life emergencies, you should always have an emergency cash fund of at least 6 months of your normal operating expenses. Ideally, this is in a high-interest rate bank savings account, which is liquid and will grow your money slowly to somewhat keep up with inflation. This will also prevent you from liquidating your investment positions, which is not ideal for stock investment compounding and when the market is in a downturn, as you'll be realizing a loss.
  • Pay Down Costly Debts: To ensure that you're making a real realized return from your investments, you should pay down any high-interest rate debts (e.g., credit card debt, student loans, medical, or anything above ~7%). Otherwise, any profits you make, on average, will not be enough to cover the cost of these expensive loans. Moreover, any asset class that is expected to generate a greater annualized return than these high-interest debts is inherently a riskier or more volatile asset class. Therefore, you'll have to be prepared to stomach more volatility while also being in debt. Clearly, this situation should be avoided.
  • Understand the Market: You must understand how the stock and bond markets work, and what drives their market movements (e.g., inflation, interest rates, news events). This will help prevent you from making rash investment decisions and from having little tolerance during volatile times. Put simply, any smart investor would want to understand the asset classes they're investing in before investing significant amounts of capital.

The article linked below goes more in-depth on these fundamentals all investors should follow before investing in the stock market:

Step #2: Align Yourself With the Investing Life Cycle

The second step in developing an investment plan is to align yourself with the investing life cycle. Ultimately, what's important when aligning yourself with the investing life cycle is to keep in mind that there's no formula for investing. Instead, there are different stages that people move through as they get older, and what results from these different investment stages are different investment approaches and portfolio allocations to ultimately reach the investment end-goal. This end goal may also be ever-changing depending on your personal needs.

I've broken out these stages of the investing life cycle into three. Graphically, the investing life cycle generally looks something like the chart below:

| Stablebread
Investing Life Cycle | StableBread

These three stages to the investing life cycle are described further below:

Stage #1: Growth-Oriented Youth Stage

The first stage is the growth-oriented youth stage, which is roughly anywhere between 18-40. Investors who are young and have a relatively longer time horizon to retire should have a higher risk tolerance and be more growth-oriented in their investment approach.

This is because if the stock market falls, for example, they have significantly more time to wait for their positions to recover versus someone who is near-retirement and wants to preserve as much as their capital gains as possible. Additionally, investors who are younger generally have less capital to deploy than someone who is older. Given this, it makes more sense to allocate into riskier positions given the higher return they can generate on a smaller investment position.

Stage #2: Middle-Aged Consolidation Stage

The second stage is the middle-aged consolidation stage, which is roughly anywhere between 40-60. Investors in this age range should already have a growth-oriented stock portfolio, but during this age range is typically when family demands and responsibilities become more important. This includes saving for children's education, overall increased expenses, and prioritizing more for retirement savings. Therefore, the focus should transition from higher risk investments to higher-quality securities with less volatility, so that you're able to preserve capital more efficiently and lower your downside risk exposure.

Stage #3: Retirement Stage

The last stage is the retirement stage, which is roughly anywhere after 60. The average age of retirement in the U.S. is 62-65, so planning that you will retire at this age is the norm. At this point, you'd want most of your portfolio to be in fixed income or low-risk investments, so that you're able to preserve and live off your investment asset income distributions. Therefore, you should be highly conservative so that you can supplement your retirement income.

Step #3: Establish Your Investment Goals

The third step in developing an investment plan is to establish your investment goals. For many people, this could include accumulating retirement funds, saving for major expenditures, building an income stream, and/or sheltering income from taxes. When you establish your investment goals, you should write down your investment process with target dates and expected risk tolerance levels required to reach these goals.

More specifically, I recommend that investors have their own "investment policy statement." This will help you determine your investment time horizon, risk tolerance levels, tax situation, income needs, and return objectives. The investment policy statement therefore serves as a road map of where the investor would like to get to financially.

The CFA Institute, a widely recognized organization for investment professional, looks at the following objectives and constraints when creating an investment policy statement:

  • Return objectives: You should understand the purpose of your investment portfolio's funds. For example, an investor may want to focus on income generation over capital appreciation. When writing down your return objectives, be specific. For example, if you're writing an investment policy for your retirement, it may look something like "generate $50,000/year in retirement, with the amount growing at the rate of inflation."
  • Risk tolerance: Your risk tolerance is dependent on a number of factors, including psychological makeup, age, income, amount of wealth, liquidity needs, and time horizon. This will all factor into the appropriate risk exposure you're willing to have in your portfolio.
  • Time horizon: Your time horizon depends on your age, as discussed prior. Investors may also have a number of time horizons, one for short-term goals such as buying a car, intermediate term goals such as funding a child's education, and long-term goals such as retirement.
  • Taxes: Strategically investing in the most tax-advantaged manner is key to your long-term investment success. Tax impacts or implications is not only limited to prioritizing investing in tax-advantaged retirement accounts first, but also extends to selecting one suitable investment over the other (e.g., are gold ETFs worth it over an S&P 500 ETF given their greater tax implications?).
  • Liquidity: If you need money in the near-future, you'll need more liquid investments that can be easily converted to cash at a fair price. Therefore, this would mean your portfolio would be more concentrated in cash, stocks, and short-term fixed income investments, for example.
  • Legal: There may be a number of legal considerations (federal and state) for the investor to consider in their investment plan. For individuals, it is necessary to know the legal limits that can be contributed to a retirement account or the amount that must be withdrawn from one of these accounts in retirement. Additionally, for charities or foundations, there may be a legal charter that needs to be followed.
  • Responsible Investing: Investors who want to have an environmental, social, governance (ESG) portfolio, must construct and note this style of investing, as it will affect the investment decisions a socially conscious investor will make.
  • Unique Circumstances: For more sophisticated investors, there may be specific policies that investors will need to consider when managing their portfolio and purchasing lesser-known asset classes.

Preparing an investment policy statement with these objectives and constraints will help you in becoming a successful long-term investor.

Step #4: Select Suitable Investment Asset Classes

As an investor, you should always assess the potential return and risk of different investment vehicles. You should therefore select suitable investments for your portfolio, which means researching and gathering information on specific investments. Afterwards, you simply deploy capital in them accordingly depending on your confidence and risk tolerance in these different asset classes.

Each stage of the investing life cycle has different investment assets that are generally more relevant and logical to allocate more capital to depending on one's age and risk tolerance levels. These investment asset classes are summarized below for each stage of the investing life cycle.

Stage #1: Growth-Oriented Investments

Typical growth-oriented youth stage investments should include the following:

  • Growth Stocks: A stock represents ownership in a company in the stock market. Generally speaking, you make money from stocks as the stock price goes up. Growth-oriented investors should focus on investing in stocks that promise higher potential return, which means a focus on capital gains over income (from dividends). Specifically, these stocks should be in growth stocks, small-cap stocks, some value stocks, the market (e.g., the S&P 500 Index), commodities, and international growth stocks.
  • Options: An option provides investors the right, but not the obligation, to buy or sell a stock (or another asset) at a specified price by a specific time. Stock options generally offer greater upside potential over stocks but also come with greater risk and costs to the investor. Note that investing in options is often for more sophisticated investors and is not required to be a successful growth-oriented investors.
  • Cryptocurrency: A cryptocurrency (aka "crypto") is a digital asset that is supported by a technology known as "blockchain." Individual units of cryptocurrency are referred to as "coins" or "tokens," and are limited in supply. These coins also circulated without the need of a government or bank, and can be used to buy some goods and services, although not the extent yet to which the U.S. dollar has access to. In short, advocates of cryptocurrency see it as the currency of the future (e.g., with Bitcoin), and for investors willing to take on considerable amounts of risk, this may be a worthwhile investment. My only advice is to keep your cryptocurrency position in your portfolio to be below 10%.

Stage #2: Middle-Aged Investments

Typical middle-aged consolidation stage investments should include the following:

  • Real Estate: Although the later-stage of the growth-oriented youth stage can typically participate in this investing asset as well, buying and owning real estate in an investment strategy that can provide a regular stream of income and capital appreciation. Investors who are interested in real estate can use leverage to buy properties and then pay off the remaining balance plus interest over time. Even with leverage, investing in real estate has a higher barrier to entry than investing in stocks, and is typically more time-consuming, given the requirement to manage tenants and the physical property itself.
  • Low-Risk Growth, Value, and Income Stocks: You should continue investing in stocks, but you should begin reallocating your portfolio during this age range to target low-risk growth, value, and income stocks. Doing so will reduce the volatility of your portfolio, ensure your sizeable value stock or ETF investments will be of much greater value by the time you retire, and will improve your ability to generate sizeable dividends from your investments which will help with your increased expenses and to aid in retirement.
  • High-Grade Fixed Income: "Fixed income" means income from any asset that is set at a particular number and does not vary. Most commonly when discussing investing, this refers to bonds. Bonds are a form of lending. When you buy a bond, you lend an institution money (e.g., governments and companies). This is a lower risk and lower expected return asset, and is useful for investors looking to generate income. My advice here is to allocate a portion of your portfolio in B+ rated bonds (~20-50% depending on your goals), as rated by credit rating agencies (e.g., S&P Global Ratings, FitchRatings, or Moody's), as these are less likely to default.

Stage #3: Retirement Investments

Typical retirement stage investments should include the following:

  • Income Stocks: Having a portion of your portfolio in large-cap stocks that have been paying and growing their dividend distributions every year consistently for the last 10+ years is a great way to generate increasing amounts of income every month. Ideally, you should be targeting a portfolio dividend yield of at least 3%. These dividend payments should be considerably large by now, given that you started allocating more towards income in your middle-aged consolidation stage.
  • Government Bonds: Government bonds, such as treasury bonds, are some of the lowest-risk and lowest expected return investments out there. This is perfect for someone a few years from retirement who should be preserving their wealth. At this stage of your investment career, fixed income investments such as government bonds should make up 50%+ of your investment portfolio.
Tax-Advantaged Retirement Funds

When it comes to investing in tax-advantaged accounts specifically for your retirement fund, investors make these investment choices through various stock (aka equity) or bond (fixed income) mutual funds or exchange traded funds (ETFs), whether it be through yourself or the company you work for.

To begin, all investors should individually open a Roth IRA as soon as they're able to and maximize their contributions every year, so that they can receive tax-free income once they reach the age of 59 1/2. For most of your life, this will be $6,000 per year. For the average person, a Roth IRA should be started in college or after graduation, when they're generating income and have paid off all their costly debts.

Roth IRA's also have annual income caps, so alongside the compounding investing in a Roth IRA provides, you can get your money into the tax-advantaged account before you may not even qualify anymore. I recommend that investors use ETFs for their Roth IRA, given their low-cost and efficiency. You can read more about selecting the right ETFs for your Roth IRA in the article linked below:

I also recommend that you prioritize investing in mutual funds through your tax-advantaged retirement fund (e.g., a 401(k)) offered through your employer. These are financial institutions that pool together money from many different investors and then purchase and manage different securities for their fund (e.g., typically stocks and/or bonds). If your employer matches your contributions for investing in these mutual funds, for example, 50 cents for every dollar you contribute up to 5% of your earnings, you should make full use of this benefit.

When you choose a mutual fund, you want to select a fund with very low expenses. Selecting a mutual fund with a higher fee structure can result in significantly lower realized returns over the long-term. There's much more to selecting the right mutual fund, as discussed in-depth in the article linked below:

In conclusion, when investing in a tax-advantaged retirement fund such as a Roth IRA or a 401(k), the recommended approach is to simply buy an index that tracks the market. You do this because it's very difficult for investors to beat the market. Put simply, this is because there are many market participants out there that are all trying to beat the market, which makes stock market prices efficient and hardly mispriced. This is why most people should just track the market index rather than try to beat it.

Step #5: Construct and Manage a Diversified Portfolio

The final step is construct and manage a diversified portfolio. This diversified portfolio should align with where you are in the investing life cycle and your investment policy statement. Additionally, it should be easy for you to track and reallocate this portfolio as you age and/or as your investment goals change. For ETF portfolios specifically, I've discussed a method to build and efficiently re-balance your portfolio as you age:

It's also important to note that companies can also offer you stock for the company you work for, which is an added bonus for your retirement fund and for your diversified portfolio. If you're working in a publicly traded company in the U.S., you may have the option to invest in the stock of your company, which can obviously work in your favor or not depending on how the company performs. Either way, if the company goes under, you'll lose your retirement money and possibly even your job as well, so it's just a small piece of a properly diversified portfolio.

Ultimately, a real diversified portfolio is a portfolio that has investments across different asset classes (e.g., stocks, bonds, real estate, commodities, etc.) and industries (e.g., tech, consumer staples, healthcare, industrial, etc.). Proper diversification can increase your long-term realized returns and reduce your downside risk potential, thereby increasing your chances of retiring as a successful investor.

For reference, one example of proper diversification for somewhat more sophisticated investors is Ray Dalio's "All Weather Portfolio," as shown below:

After constructing a diversified portfolio, you'll need to manage the portfolio, unless you're fully invested in mutual funds who'll do this active management for you. This process begins with comparing the actual behavior of the portfolio with the expected performance. For example, if you expected a real estate property to generate a cap rate of 10% annually in your investment policy but it fell short at 8% for the year, this may be worth looking into. Another basic example is comparing your equity portfolio's performance to the S&P 500 Index over any given time period, to ensure that you're not falling far behind the market.

What's important when managing your investment portfolio is to identify positions that look off or are out-of-balance. This is what should prompt you to take corrective action by rebalancing your portfolio and/or reallocating under-performing and/or over-weighted positions. Once caution here is to check the tax consequences of rebalancing and reallocating these investment assets, as it could be quite costly if not done efficiently.

The Bottom Line

As a long-term investor, you're investment career begins on the growth-side (e.g., stocks and cryptocurrency), as you want your money to grow and compound over time by the time you eventually retire. Therefore, you should have more risk exposure and return expectations. As you age, you will generally have more responsibilities and income, which is when you should be able to invest in opportunities with a higher barrier of entry (e.g., real estate). Finally, when you reach retirement, you're looking for income and some growth to keep up with inflation. This is when you'd want to invest more in fixed income (e.g., bonds) so that you reduce the volatility in your portfolio and ultimately minimize your portfolio's downside risk.

In closing, a successful investor will follow the five basic steps discussed in this article to develop an investment plan and achieve their investment goals. Laying out a plan and strategy is key to long-term investing success and for a successful retirement. Ultimately, what's most important is sticking with the plan, managing your portfolio, and adjusting your downside risk exposure depending on where you are in the investing life cycle.

Disclaimer: Because the information presented here is based on my own personal opinion, knowledge, and experience, it should not be considered professional finance, investment, or tax advice. The ideas and strategies that I provide should never be used without first assessing your own personal/financial situation, or without consulting a financial and/or tax professional.

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