Creating an Effective Investment Plan

When deciding on a strategy for your investments, there are many factors that should be taken into consideration.  Effective investment strategies aren’t a one-size fits all approach, and each individual should take the time and care to ensure that the result is optimized for their needs.  A good start would be to ask yourself the question, “What is the job description for this investment?”. It could be for retirement needs, college funding or crafting a financial plan. It can be helpful to select a strategy for investing to better determine if you are reaching the goals you set.

Below are three popular strategies investors may decide to take:

1) Goal Based Investing – this type of investor determines that certain outcomes are desired. They acknowledge that the investments in the portfolio are pieces to help realize that outcome. Common goals can include the following:

  1. Capital Appreciation – Ideal for someone who is looking to achieve a target dollar amount over a specific period of time. This may be over one’s working years or the amount of time before a child enters college. Another scenario is someone who wants their investments to outpace the broader financial markets.
  2. Spend off the principal of the portfolio – These investors expect to live off the account balances of their portfolio. Their focus is to spend down the account value accumulated over time. Care should be taken to ensure that they will not outlive their finances.
  3. Preserve the portfolio – These investors are generally looking to take as little risk as possible. Their focus is to generate returns that will outpace inflation and preserve the purchasing power of the portfolio.

2) Index Investing – this type of investor has a desired benchmark in mind. The goal and time horizon of the investor suggests the portfolio stay close to the benchmark weight with deviations in a certain range. This approach results in returns similar to a broad index as investors are attempting to replicate the performance of a specific index. This can be an efficient way to capture the returns of an index without buying all the individual components of that index. Another benefit is investors can achieve diversification without going through the process of individual stock selection. This can be accomplished by purchasing an exchange traded fund or ETF. Investors should be mindful that index investing generally does not include market factors like value, momentum, and quality. These factors strive to generate higher risk-adjusted returns vs. an index.    


3) Drawdown Investing – this type of investor selects a portfolio comprised of assets that could potentially limit their losses to a certain extent within the portfolio over a given period of time.  To achieve an allocation, a stress test is typically performed on the portfolio, showing how these assets have performed in various historical market cycles and events.  This could create a significant deviation in returns between the portfolio and the benchmark to reach the goal. Examples of strategies that target this goal are Aggressive, Growth, Moderate Growth and Conservative to name a few. Below are some considerations that can inform a Drawdown Investment Strategy:

  1. Identify what you need to withdraw – calculate how much you’ll need and want per month or per year for a desired standard of living, balancing the resources you have. This requires closely examining expenses, which is a big driver of what you’ll need in retirement.
  2. Look at different income sources – examine sources like social security and consider taking social security at the age that will be optimal for you. At Insight we have great tools that can help when deciding to take Social Security in the context of your financial life. If you have income from part-time work, you’ll want to factor that in. These different income sources can reduce the income need of the portfolio, which can extend its ability to provide over your lifetime.
  3. Understand how drawing from different assets/accounts impacts taxes – drawing assets from different kinds of accounts will impact the taxes you need to pay when you start drawing down in retirement. It’s important to plan before the drawdown starts by positioning retirement, investments, savings, and other accounts that can be used in retirement planning appropriately. This will help ensure that your drawdown is tax efficient along with being investment and time diversified.

Regardless of the strategy you choose, it is important to remember that one of the most important factors is you and your ability to stay discipled toward your goal. Individuals who make frequent short-term changes to their portfolio based upon market conditions can greatly affect the long-term success of reaching their initial goals.

At Insight we encourage everyone to set clear goals for their portfolio and select the strategy and investment plan that will help them reach those goals. Your investment plan will be determined by risk tolerance, risk capacity and time horizon to name a few. Investors should also think about diversification, not only from an investment holding perspective but also being time diversified. This type of diversification can not only provide support when financial markets are volatile like we are seeing currently but also protect against inflation eroding purchasing power over time.

Written by,

Alex Austin, CFP®

Alex Austin, CFP®

Alex is a comprehensive, fee-only financial planner. Alex made a career move into personal financial planning and investment management after 10 years in investment banking and corporate finance to find more meaning in his work and better match his personality and interests to his career. It’s worked out better than he could have imagined.

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Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements. 

Insight Wealth Strategies, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Insight Wealth Strategies, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Insight Wealth Strategies, LLC unless a client service agreement is in place.

Insight Wealth Strategies, LLC (IWS) and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.