One of the most important things to do is, create your investing plan. This is regardless of what type of investing you plan to do. We will specifically look at what you should be thinking about in your long term investing plan. Make certain that you write all this down in a nice document or even type it all up and hang it in your home office. Following the plan will help your long term financial success. Don’t forget to make certain that you follow the rules for investing. Use research to your advantage and spend a good amount of time understanding what you are reading and digging deeper for what you find difficult to understand.
Account Size and Account Types
Firstly, you must decide on what kind of funds you want to part way with. The importance of this is to understand the amount of money that you plan to lock away. Typically when we talk about long term investing we are talking in terms of more than a minimum of 3 years. However, in most cases we would prefer to look at long term being until retirement. Therefore, it would be best if your funds are not part of your emergency funds. However, depending on your risk management strategy, you may choose to place your emergency funds in to your investments.
Account types are the next item in your long term investing plan that should be considered up front. This is where you must plan out which type of account you will open for your investments. Depending on what your goals are, this may be specific types of retirement accounts. You may want to invest within non-registered accounts vs registered accounts. This is completely up to you, I personally recommend registered accounts in order to tax shelter as much money as you possibly can.
Risk Management, Portfolio Weighting and Breakdown
Both of these topics go hand and hand. Your portfolio weightings will alter and change the amount of risk that you are subjecting yourself to. For example, the typical portfolio on this site would be to have 60% of your investments in equities and 40% in fixed income. If you have a different weighting than this, let’s say higher weightings in equities, this would increase your investment risk. You must evaluate how much risk you are willing to accept. If you are young and more daring, you may want to expose yourself to some more risk. However, if you are close to retirement, you may want to shift your portfolio more towards lower risk. That would be to have a higher percentage of fixed income.
Plan your overall portfolio weightings in terms of equities vs fixed income and then break in to how much you would consider investing in each asset type or category. Once you have the breakdown of which asset type you require, then go ahead and start to pick out the specific ETF’s you would like to invest in. A detailed plan at this stage will allow you to make informed and quick purchases later.
Determine your Monthly or Annual Savings Contribution.
This part of your investing plan will allow you to determine how much you wish to contribute on an annual or monthly basis. There are several reasons why you must include this as part of your plan. Simply speaking, some people would not contribute a dollar as they may not remember or just couldn’t be bothered. If this could be you, you may want to include as part of your plan a set amount to come out of your banking account on a specific day automatically. This will guarantee that you are following your investment plan.
Determine your Re-balancing interval
Re-balancing a portfolio is where you trade assets in your portfolio such that the original goal percentage is achieved. You must do this anywhere from a 6 month period to every 2 years. The recommended interval is every one year. Keep in mind that re-balancing at quicker or longer intervals does not necessarily improve your growth. Select a calendar day when you plan to re-balance your portfolio and write this down as part of your long term investing plan.
Your long term investing plan – if the Market tanks (Bear Market)
This is not to get you worried about long term investing. However, this is something that we need to discuss. What we say right here may come as a complete surprise to you and I can not emphasize it’s importance enough.
If the market were to turn for the worst, this is where we need to have this part of the plan written down. The key part of the plan here is to make certain that you only continue to follow everything as above. DO NOT let emotion get the better of you. I only say this as I know just like everyone else that it is very difficult to watch your investments push continuously lower. But, we know something that will help us out. That is, over the long term everything averages out. This is just part of the economy or market cycle and we will go through periods of tough times. Just remember to continue to invest your typical contributions and re-balance at your selected balancing interval. When ETF’s are on sale, this is the best time to buy!
Do what ever you have to, to try and push through the tough times.
What is next?
The last component to your long term investing plan, is to select an investment broker. Choose a broker by researching the best one that makes you comfortable placing your entire portfolio with. Write this down.
The next step after your plan is complete is to start opening an account with your broker.