A Practical Seven Step Guide to Investment Planning

Key Takeaways 

• Investors will be able to use online tools or financial advisors to track investment performance and adjust as needed. 

• Individuals first need to determine where they are financially before establishing an investment plan. 

• It is crucial to create a portfolio composed of a variety of investments that do not fluctuate at the same time. 

Many people are interested in investing but do not know how or where to start. If they never get going, their money may never make money. They also may lose out on opportunities to gain financial independence or achieve goals 

However, by educating themselves on the basics of investment planning and strategies, these individuals can gain the knowledge or confidence to get started.

With that said, here is a practical, actionable guide to creating a personalized investment plan.

Actionable Steps

Step 1: Assess Your Current Financial Situation

The first step is to take a clear-eyed view of current personal finances. People need to determine where they are before setting forth an investment plan. Simply put, there must be a determination of how much money is available to invest.

That calls for gathering information about income, expenses, and existing debt. There are budgeting tools and online calculators that can be used to simplify the process. 

There should also be consideration of how liquid the investments must be. Some investments are more liquid than others.

Step 2: Define Your Financial Goals

Once the person has a grasp of their finances, they can formulate specific short- and long-term financial goals. Such goals can be a new car, retirement, or education, for example. The individual can then set realistic timelines for achieving them.

As a general guideline, if money is needed in fewer than three years, stocks will likely be too volatile. Instead, consider CDs, money market funds, or bond funds.

If money will not be required for three to five years, some stock investment may be appropriate, depending upon risk tolerance. However, most positions should probably be in bonds or cash equivalents. If the financial goal is six to 10 years out, more stocks may be added to the portfolio.

Note that all goals can be categorized as safety, income, and growth. Safety is when the aim is to maintain current wealth levels, while income is when active income to off which to live is sought. Growth is when the investor seeks to build wealth over time.

Step 3: Determine Risk Tolerance and Time Horizon

Now it is time to consider risk tolerance and its impact on investment decisions. The reality is that markets fluctuate, and that any investment carries some element of risk. Thus, the investor must decide how much risk they are willing to take on. In so doing, they can determine whether they wish to invest conservatively, more moderately, or aggressively. 

To help assess risk tolerance, there are resources available such as online quizzes. Investors may also seek the advice of financial professionals.

When choosing investments, it is important for investors to consider the timeline for each financial goal. They should ask themselves how quickly they wish to make money from their investments. Do they want to experience quick growth, or do they seek investment growth over time?

Step 4: Choose Your Investment Options

The investor can now consider the various asset classes available to them, in accordance with their budget, goals, and risk tolerance. In general, higher returns are commensurate with increased short-term volatility.

Investment options can be grouped in the categories of growth, growth and income, income, inflation protection, and defense.

Under growth, assets can include domestic large- and small-company stocks, and international developed-country small- and large-company stocks. They also include international emerging-market stocks.

Growth and income opportunities include U.S. and international high dividend stocks, U.S. and international real estate investment trusts, and master limited partnerships.

Under income, options include investment-grade municipal bonds, U.S. securitized bonds, and U.S. investment-grade corporate bonds. They also include U.S. high-yield corporate bonds, bank loans, preferred stocks, and international emerging-market bonds.

Inflation protection assets include commodities and U.S. inflation-protected bonds, while defensive assets refer to cash and cash investments and U.S. Treasury securities. These assets can also include international developed-country bonds, and gold and other precious metals.

Of particular importance here is the necessity for diversification across various assets to manage risk. It is crucial to create a portfolio composed of a variety of investments that do not fluctuate at the same time. This provides exposure to varying investment types and market sectors.

Alternative assets such as commodities and cryptocurrency are popular as tools for diversification, which can also protect against inflation and can even boost returns. Such assets are “alternatives” to stocks, bonds, or cash.

The alternative investment platform Yieldstreet offers an investment calculator that can help investors determine the amount they might need for retirement. 

Step 5: Develop an Investment Strategy

Next comes formulation of an investment strategy, as it relates to asset allocation — how securities are invested. Asset allocation is key to long-term success. Why? Because different asset classes have different responses to the market. 

For example, while stocks are quickest to respond to market changes, alternatives are scarcely impacted due to their low correlation to public markets. Bonds also generally offer relatively stable returns. Investing in all three can help manage overall volatility.

When allocating assets, make sure they align with individual risk tolerance and short- and long-term goals. They should also be based on the likely number of years the person has to invest.

Here are sample strategic asset allocation models with varying risk and return balances. Note that more modern allocations that include alternatives will be discussed later.

Conservative Allocation

• 30% cash
• 40% fixed income 
• 5% international equity 
• 15% large-cap equity
• 10% alternatives

Moderate Allocation

• 30% large-cap equity
• 10% small-cap equity 
• 10% international equity 
• 30% fixed income
• 5% cash
• 15% alternatives

Aggressive Allocation

• 35% large-cap equity
• 20% international equity 
• 20% small-cap equity 
• 5% cash investments
• 20% alternatives

Note that periodic portfolio rebalancing is necessary to mitigate volatility and manage prospective risk. It may also be necessary as life priorities change.

Step 6: Set Up an Investment Account

Now the investor is ready to establish an investment account. First, though, they must choose among many different account types, including:

• Brokerage. These can be created with robo-advisors, online brokers, financial advisors, or full-service brokers. The accounts can be used to invest in stocks, bonds, and more. There are two types of margin accounts: cash and margin.
• Cash. To purchase securities, the investor must pay the full amount. Money may not be borrowed.
• Margin. Here, the brokerage is allowed to lend money to an investor for the purchase of securities. This strategy is considered particularly risky.
• Retirement. There are a myriad of forms, including a Roth IRA, SEP IRA, and employer retirement plans, with a variety of functions. Some have tax penalties if funds are removed before the individual turns 59.5. Note that Yieldstreet offers a private-market IRA rollover program.
• Education savings plans. A 529 plan is basically a savings plan with tax favorability. It aims to incentivize people to set aside money for future qualified education expenses by choosing among various investment options such as a principal-protected bank account, mutual fund, or exchange-traded fund.

Investors should research and compare different investment platforms based on fees and features.

Step 7: Start Investing and Monitor Progress

Investors will be able to use online tools or financial advisors to track investment performance and make adjustments as needed. What is important is to begin investing — consistently, even with smaller amounts.

For its part, Yieldstreet offers accessible opportunities that once were the exclusive province of institutions and high-net-worth individuals. It also offers the broadest selection of alternative asset classes available, including art, real estate, venture capital, and more. Opportunities are highly vetted and undergo rigorous screening.

No investment is without risk. However, private-market offerings are increasingly popular as investors seek refuge from intrinsically volatile public markets. After all, the private market has outperformed the stock market in each downturn of nearly the last two decades.

Alternative Investments and Portfolio Diversification

Alternatives can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that meant the potentially exceptional gains these investments presented were also limited to these groups.

To democratize these opportunities, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10000.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary 

Those who seek to take control of their financial future can use this actionable guide to establish a personalized investment plan. To get started, they must assess their financial situation, define goals, and determine their risk tolerance and time horizon. 

After choosing among investment options, they can then develop an investment strategy and begin their investment journey. If needed, they should also seek professional guidance.