The Roadmap to Financial Freedom: Mastering Investment Planning

What is an investment? 

An investment is something you commit money or capital to with the general aim of generating a financial return, i.e., getting back more money than you put in. Making money on an investment isn’t guaranteed, however, as every investment carries risk; generally, the riskier the investment, the higher the expected return.   

In this post, we explore the concept of investment planning, how to create a long-term financial plan, and some of the best ways to make money in Australia.

What is investment planning?

Investment planning is the process of deciding where and how you’re going to invest your money to achieve your long-term financial goals. As part of the planning process, you’ll need to devise and follow a series of investment strategies based on your current financial situation – and the capital you have to invest, your financial goals, and your risk tolerance. It’s common for individuals to consult a financial planner to assist with their investment planning, even if just to check in periodically to ensure they’re on the road to financial freedom.

How to make an investment plan?

Let’s take a look at each step of the investment planning process. 

Set financial goals

To reach your desired financial destination, you must know where you’re going – so the first step in investment planning is creating, clarifying, and writing down your financial goals. This involves determining your overall life goals, e.g., buying a house, what you want to provide for your family, at what age you want to retire, etc., and how much you’ll need for those things.

A crucial aspect of setting financial objectives, and investment planning, in general, is establishing the timeline for your goals. Giving a goal a timeline gives it substance and holds you more accountable for achieving it; a deadline by which to achieve a goal will inspire you to take action towards its accomplishment.

Generally, investment planning goals can be categorized as:

• Short-term (under two years)
• Medium-term (two-five years)
• Long-term (over five years)

Assess your current financial situation

Before implementing investment strategies, you must assess your present financial situation honestly. An accurate understanding of your current finances illustrates the difference between where you are now and where you want to be – and what you need to do to achieve your financial goals. This requires determining your income and assets and outgoings and liabilities.

Income and assets include:

• Salary
• Savings
• Superannuation fund 
• Property
• Investments

Outgoing and liabilities include: 

• Monthly expenses
• Mortgage
• Personal loans 
• Credit and store card balances 
• Other debt

Ultimately, to achieve financial freedom, your assets need to produce an income greater than your monthly expenses. 

Assessing risk tolerance

Your risk tolerance is your ability to withstand fluctuations in the value of your investments without being left financially vulnerable. If you have a high-risk tolerance, you can afford to take advantage of riskier investments, which offer the potential for significant financial gain – but considerable losses too. Conversely, a low-risk tolerance means you’ll be notably affected by a depreciation in the value of your assets, which calls for less risky investments. 

Factors that risk tolerance include:

• Age: Generally, the younger you are, the more risk you can take because your investment portfolio has time to recover losses
• Health: poor health typically means low-risk tolerance, as your ability to generate an income is diminished, and you may have high medical expenses
• Financial buffer: the bigger your financial buffer (high monthly income, savings, support network, etc.), the better your ability to recover from losses
• Outgoings: the higher your ongoing expenses, the lower your risk tolerance
• Financial goals: the more ambitious your goals, the higher your risk tolerance must be to chase the highest returns.

Your investment strategies should reflect your risk tolerance for the best results. 

Identifying investment options

Arguably the most important part of the investment planning process is deciding the type of investments to make, i.e., which asset classes to invest in. Asset classes can be roughly categorised as defensive investments, which are lower risk and aim to provide income and protect the principal capital, and growth investments, which are higher risk but potentially offer higher returns. 

Defensive investments include:  

• Cash: high-interest savings accounts and term deposits.
• Fixed interest investments:  debt securities, e.g., AGBs, corporate bonds, capital notes, etc., that frequently pay out interest at a set rate and return the principal after a fixed-term. 

Defensive investment planning is generally used to achieve short–term financial objectives, protect wealth, and generate a steady income. 

Growth investments include:

• Shares: investing in a company by buying small portions of it; investment strategies may include Australian and/or international shares 
• Property: could be residential or commercial
• Alternative investments: a catch-all -term for other investments such as private equity, hedge funds, commodities, and unlisted infrastructure

Growth investment planning is typically used to generate higher rates of return in more risk-tolerant investment strategies – which can be volatile in the short-term – and achieve longer-term financial objectives. 

For the best chance of achieving your long-term financial goals, it’s wise to consult an financial planner when choosing which asset classes to invest in. An experienced financial advisor will help you match your investment strategies with your current situation, risk tolerance, and goals.

See more: Retirement Financial Planning

Creating a diversified portfolio

One of the most crucial investment strategies for long-term financial freedom is diversification. This refers to the practice of spreading your investments across different asset classes, so you can limit your losses if one type of investment falls in value. In other words, diversification means not putting all your proverbial eggs in one basket. Now, if most of your investment capital is in one or two asset classes, you need to research others in which to place your money. Let’s say, for instance, you own an investment property: purchasing another, without any other investments, puts your financial future in jeopardy if real estate prices fall. To diversify, you must invest in different asset classes, like fixed-interest investments or shares.

Additionally, as well as spreading investment capital across asset classes, you can diversify within asset classes. For example, if investing in shares, it’s unwise to put all your money in one company – or even a sector. Instead, you must invest in different industries to weather any downturns in a particular sector.

Overcoming challenges in investment planning with K Partners, Melbourne’s premier financial advisors

K Partner’s team of financial advisers in Melbourne have advised many clients on the best ways to invest money in Australia and, subsequently, the most effective ways to reach their financial goals. We’ll take the time to fully understand your current situation, your most deeply-held financial objectives, and devise investment strategies to help you achieve them. 

To get on the road to financial freedom, schedule your consultation with one of our skilled financial advisors.  

Please note that all the while the information provided above is factual in nature, it’s also intended to apply generally, and to a broad audience. Subsequently, the information hasn’t taken your personal circumstances or goals into consideration.