What is an investment plan

Financial planning helps us set goals and marks out the most suitable path for achieving them

Financial planning is the process of preparing a comprehensive, organized, detailed, and personalized investment plan that guarantees the achievement of previously set financial objectives, as well as the terms, costs, and resources needed to make it possible.

The advantage of an investment plan is that it enables you to chart out a course for your money through financial management. In other words, through financial planning, we can set goals and put our strategy in black and white.

Financial planning is a continuous process in which you essentially start off from scratch. It is at this starting point where you realize the need for a plan and decide to carry it out. We should not forget that, like all plans, it requires continuity, rigor and, as it imposes financial constraints, a certain amount of sacrifice. It is important to take into account that the savings objectives that normally require the most planning are those programmed for the medium- and long-term. This should not be used as a reason to avoid planning. Quite the opposite: the benefits of good planning hugely outweigh any possible sacrifices made along the way.

The financial planning process comprises five stages:

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1. Defining objectives

What are we saving for? Accumulating money without a clear objective is inefficient. Are we saving for retirement? To buy a holiday home? For our children's university fees? The implications of some objectives are completely different from those of others in terms of priorities, the term of the investment, liquidity needs, and risk profile. As are the vehicles in which to channel the investments properly: to save for retirement we are well-positioned with a pension plan, but that would not be a suitable vehicle if, for example, we want to save for a new car.

2. Analyzing the basic resources

What financial and non-financial assets do I have at my disposal? Am I starting from zero or am I already on the way?

We will also have to analyze our income and expense structure in detail. In this respect, especially in savings objectives of vital importance, such as those for retirement, we need to change from the usual mindset of “saving what we have left over after deducting all our expenses from our income” to “spending what's left over once we have deducted the amount we are saving from our income”.

3. Set out the strategy

Once the previous points have been analyzed, it is time to establish the plan: set out the periods of the investment, the risk level we are going to assume in each phase of the process (the risk profile is a factor that changes over time), the eventual liquidity needs. It is also important to consider the possible evolution of the investment in different scenarios: pessimistic, neutral and optimistic, to determine potential results in the best and worst case scenario of the expected return.
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4. Execute the strategy

After designing the strategy, the next step is to put it into practice. At this point, we will decide the vehicles through which we are going to channel it: investment funds, pension plans, direct investment in the stock market, public debt securities, etc. A crucial factor in correct financial planning is diversification, in other words, diversifying in both assets and types of assets. It is always unwise to bet on a single card in something as important as savings.

5. Analyze the evolution

Investment is rarely a linear process. There are ups and downs in the markets we invest in and sometimes also unforeseen personal circumstances. It is not infrequent therefore to deviate from objective initially set out. This is not important as long as we monitor the investment periodically and make any changes required by the new circumstances.
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