Creating a common sense investment plan

Certified Financial Analyst Ben Carlson may be a relative newcomer to the personal finance blogosphere but Ben has some great, time-tested advice in a short ebook he recently released that’s worth checking out.  In How to Create a Common Sense Investment Plan, Ben distills into 35 pages what many other financial authors take a few hundred pages to explain.

Ben’s ebook is a step-by-step process about goal-setting, ways you can save, investment options, understanding your risk, building your portfolio and learning more about your emotional attachments to money.  Here is some of the financial planning advice you’ll read about in Ben’s ebook:

On the topic of goal-setting:

“Using goals and focusing on why you are saving and investing is the best way to create a lasting investment plan….write down your goals…”

On the topic of savings:

“You must realize what compound interest can do for your savings. It takes time and patience, but the longer you save, the greater your wealth will grow. Warren Buffett once said, “Someone is sitting in the shade today because someone else planted a tree a long time ago.””

On the topic of understanding stocks, bonds and other asset returns:

“Stocks returns since 1928 have been over 9% a year. Bonds have earned around 5% and cash and cash has returned a little over 3%.”  So, with stocks over the long-term time returning more than bonds which returns more than cash, Ben writes:

“If you are in the accumulation phase of your career (meaning you are still saving) you should actually welcome periodic losses in the markets you invest in. That will give you a chance to buy at lower prices, which increases your future investment returns.”

On the topic of risk:

Ben reminds you that “daily, weekly, monthly and even yearly movements in the markets won’t matter over decades and decades of investing.”

On the topic of active fund money management versus passive investing:

“I could give you the results from dozens of studies over the years from different time frames, but I’ll spare you the details. I’ve read them all and they all show the same results. After accounting for the costs of active management (trading, expense ratios, marketing fees, etc.), index funds are the clear winner over active funds.”

So, Ben suggests:

Invest in index funds or ETFs for broad diversification for lower costs and simplicity, because costs kill fund returns and “are one of the biggest determinants of fund performance over the long run.”

On the topic of emotions and behavioural investing:

Among other suggestions, Ben advises:

  • Focus on what you can control; your goals, your costs, how much and how often you save;
  • Recognize you don’t know how things will play out (nobody does);
  • Keep a long-term perspective in place; and
  • Automate your savings as much as possible.

“Your automated process will help you save on a regular basis through dollar cost averaging, rebalance to your target asset allocation weights on a periodic basis, and stay away from trying to time the stock market by continuously buying and selling. Your investment plan will be working for you so you can focus on more important things in life.”

Summary

The information in Ben’s ebook reflects the title:  it provides the basics on creating a personal investment plan.  A common sense investment plan or the advice in Ben’s book won’t perfect your plan but it will provide you with the process of planning one.  Financial plans unto themselves are somewhat of an illusion since nobody can predict the future with any accuracy.  However, the process of planning is critical so you can adapt to changes, including the financial ones in your life, when change does happen.  You can pick up a free copy of Ben’s ebook How to Create a Common Sense Investment Plan here.

3 Responses to "Creating a common sense investment plan"

    1. Daisy,
      I keep things fairly simple with my portfolio. A diversified broad based mix of US large, mid and small cap funds along with foreign stocks (large and small) and emerging markets. Also, I like an allocation to REITs for diversification purposes. I have a few other investments in my portfolio but those make up the majority of my funds. Pretty basic and it covers all of the bases.

      Reply

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