What is an investment plan?

Basically, an investment plan is your plan to achieve a certain financial goal. That is quite obvious, but people tend to forget about goal setting. They say “Who needs planning? I just want to be rich.” This is a straight road to financial hell. If you don’t know what do you want, then you won’t have any guidelines for your actions, and you’ll probably be under emotional stress. Fear and greed are very powerful emotions and they can drive you to the undesired outcomes.

In order to help you, the first thing you will need to know is how much money you can invest. This could be an amount for a week, month, year or some other period of time. If you are in debt, your first step is paying it out. You should, also, consider future investments amount. For example, if you are going to be married and you are the only one that works, it is likely that your investment capability will be lower in the future.

The next step is to resolve how much do you need and when. Using these parameters, you can calculate the return rate of your investments. For example, let’s say that you are going to invest 600$ per year (that’s 50$ per month) and that you want to withdraw 20,000$ after 20 years. This means that your average return rate should be about 4.6% per year, which is not very high rate. In the previous 20 years average return rate of Dow Jones was 10% per year.

Return rate	Net sum after 20 years with yearly addition of 600$	Net sum after 20 years with yearly addition of 900$	Net sum after 20 years with yearly addition of 1200$	Net sum after 20 years with yearly addition of 1800$
3%	16606	24909	33212	49818
4%	18581	27872	37163	55745
5%	20832	31247	41663	62495
6%	23396	35093	46791	70187
7%	26319	39479	52638	78957
8%	29654	44481	59308	88961
9%	33459	50188	66917	100376
10%	37801	56702	75603	113404
11%	42759	64139	85518	128277
12%	48419	72629	96838	145258

You can calculate the resulting amount of money for any yearly addition. Let’s say that you could invest 3000$ per year and that after 20 years and that you would like to have 200,000$. That means that you should have return rate between 10% and 11%. 5 times 600 is equal to the 3000$, 5 times 37801 is equal to the 189005$ and 5 times 42759$ is equal to the 113795$.

This way you can determine required return rate and the types of investment. Also, it can happen that your desire doesn’t match reality. For example, if you wish to invest 600$ per year and you want 100,000$ after 20 years that would mean that you need return rate of around 18% and that is very unlikely to achieve. Therefore, you should lower your expectations or you should increase your yearly addition.

With these parameters, you can find asset allocation that should give you required result with the lowest possible risk. There is a theory that helps you to do this. We will elaborate this in details some other time. Let’s just say that with this you can select assets that should be in your portfolio.

To sum it up, investment plan takes into account your desire and as a result it finds out what kind of assets you should have.