The Value of Writing Down Your Investment Plan

Chris Demarest |

One of the simplest things you could do to improve your investment outcomes is to write down your plan. The human brain has a habit of playing tricks on us when it comes to past decisions. Plus, the markets are rife with emotion. It's greed when things are going well. It's fear when things are going badly. A written investment plan may yield considerable benefits compared to the time it takes to write one. Even a one-page plan will do.

You Own Worst Enemy

As an investor, you can be your own worst enemy. Sometimes investors just owning low-cost ETFs can end up significantly lagging the markets they are trying to track. This happens because at low points in the market, losses can become too painful and it's tempting to sell. Selling can mean missing out on future gains. Then at higher market levels, it can be easy to underestimate risk and want to put more money in the market. Also, the human brain can have a tendency to re-write history, or simply forget. We forget what our plan actually was when we bought an investment.

A Quick One-Page Investment Plan

This process doesn't have to be time-consuming. However, remember that over time, the money you make from your investments could exceed what you earn from your job. So though it's easy to avoid thinking about investing, the long-term cost can be high.

Take time, perhaps just once a year to first write your plan and then to subsequently review it in future years. Keep it to a page to keep things simple. Every plan will be different, but here are a few questions to get you started.

  • What are your financial goals?

Your financial goals can be aspirational such as not having to work by the time you're 50 or buying a second home, or more concrete, such as saving a million dollars by the time you're 45 years old. Ideally, your goal should inspire you, and then creating and reviewing the plan should be more fun.

  • How much do you plan to save each year?

Your savings rate is up to you. Generally, experts recommend around 10% to 15% of your income as a good savings rate to aim for. If you start saving early enough that savings rate can lead to a comfortable and long retirement with a similar level of spending compared to when you were working. However, think about your goal and how your savings rate puts you on track for that or not.

  • How do you plan to invest your money?

Your portfolio plan again depends on your goal and your risk-level. If you need the money within a few years or don't like the risk that your investments could fall, even temporarily, then it may make sense to hold fewer stocks and more bonds. However, if you're ok with risk and won't need the money for several years, then you can perhaps be more stock heavy. Just remember to diversify.

  • What events would cause you to change your plan and how you invest?

This is an important one. If you're investing in the markets, then a 10% fall in stocks will be common. A 20% fall will happen every few years, and a halving of your stock portfolio or worse with the next recession is even possible. Understandably, investors can panic and sell with these events since they are often associated with bad news and pessimism. If you write down what you expect to do when markets drop, then it may help you make a more thoughtful decision, rather than just rashly react to the markets' movements at times of stress.

  • How will you think about taxes?

It's not always the most interesting of topics, but the government does support a number of tax-efficient ways to save. This can mean paying less tax, or no tax at all. Also, bear in mind the government puts these plans in place to support saving. Examples include 401(k) plans, 457(b) plans or 403(b)s depending on your employer. Also, you could consider a SEP IRA if you're self-employed.  These options are generally retirement-focused and won't work for everyone, but if the government is offering you a tax break on your saving, then it makes sense to look into your options.

  • Under what circumstances will you withdraw money from your investments?

This should tie back to your golf. For example, if you're saving for retirement, then using the funds to pay for a holiday likely isn't a good idea.

Putting It Together

The above questions can help you frame a plan. It doesn't have to be perfect, as Timothy Geithner, the former Treasury Secretary often says. "Plan beats, no plan". We are not aiming for perfection here, but writing down a brief summary of what your goals are for investing and how you expect to get there may prove valuable over time.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. No strategy assures success or protects against loss. Investing involves risk including loss of principal.