Investments on capital markets are mostly undertaken in order to generate a profit that will bring you closer to achieving a short or long-term goal. In order for your actions to have the greatest chance of bringing the expected return, it is necessary to plan them correctly. Learn the rules that will help you plan your investments properly.
Investment planning is a key aspect needed to achieve desired results in the financial markets, as it allows you to define the goals, strategy and direction of your investments. Without a proper plan, investing can become chaotic and risky, leading to potential losses. Appropriate investment planning should be based on the preparation of an action plan specifying how the investor intends to allocate their financial resources into various types of assets and the main components of such a plan should be:
- Defining investment goals
- Determining the time horizon
- Risk profile assessment
- Choosing an investment strategy
- Monitoring and adapting
The investment goal is the first step in planning investments and it is a key element that gives them direction. It should be a specific, measurable result that the investor wants to achieve by investing their financial resources. Investment goals can take various forms and are usually divided into short and long-term and include, for example: long-term profits, retirement, children’s education, real estate purchase or travel.
Determining investment goals requires reflection and analysis of your life and financial situation. It may be important to talk to a financial advisor who can help you define realistic goals and appropriate investment strategies, taking into account your individual circumstances.
The time horizon is the specific period over which an investor plans to achieve his or her investment goals. It is usually short or long-term, depending on the nature of the investment goals and individual preferences. Determining the time horizon influences the choice of a specific investment strategy. Investments with a short time horizon usually involve the selection of assets characterized by greater volatility, so that they can achieve the expected rate of return in a relatively short period. Long-term investments, however, allow you to choose relatively more stable instruments, characterized by lower price volatility, but also relatively stable value growth in the long term.
It is also worth remembering that the investment time horizon should be adapted to their goals. For example, investments related to retirement will usually have a longer time horizon, while investments for a holiday trip will have a shorter one.
The risk profile is an individual scale that determines what investment risk we are willing to accept when investing in financial markets and defining it helps us adapt investment strategies to our preferences. Determining your risk profile requires prudence and self-reflection, as well as regular updating in line with possible changes in your life and financial situation.
We can distinguish three main risk profiles:
- Conservative: It involves investing capital in the most stable financial instruments, such as bonds or treasury bills. This style is appropriate for people who prefer low risk while expecting lower rates of return.
- Moderate: Investors in this group tolerate medium risk in exchange for the possibility of relatively better returns. They focus on building balanced portfolios, combining e.g. stocks and bonds.
- Aggressive: Investors in this group are willing to accept high risk in exchange for potentially high returns. Their portfolio often includes leveraged instruments, such as CFDs and other assets with higher volatility.
An investment strategy is a plan of action that specifies what investment assets will be selected and how they will be managed to achieve specific investment objectives. It should be carefully tailored to the assumed goals, time horizon, risk profile, individual preferences and experience of the investor.
Below are examples of investment strategies used in financial markets:
- “Buy and hold”: An investor choosing this strategy focuses on selecting, for example, stocks that he believes have a chance of relatively high growth, most often in the long term. The portfolio created in this way usually does not change throughout the assumed investment period.
- Market timing strategy: This involves trying to predict market behavior and the direction in which the market will move in the relatively near future. When using this strategy, the portfolio includes various financial instruments, such as shares or CFDs and its composition changes frequently with the changing market environment.
- Speculation: This is one of the most popular investing techniques in financial markets. It involves forecasting changes in asset prices in a given period, and possible profits can be achieved both in the event of an increase in the value of the instrument and its decrease (so-called short-selling). Sometimes the instruments chosen by speculators are also leveraged, where the purchasing power of the invested capital is multiplied by the amount of financial leverage. However, such operations are associated with a high level of risk, which can lead to both significant profits and losses.
- Value investing: It involves selecting shares of companies with an established position on the market that are undervalued in relation to their intrinsic value. Investors using this strategy look for stocks that have high growth potential over the long term.
Monitoring and adapting
Financial markets are constantly changing. Economic conditions, the financial condition of enterprises, and interest rates are aspects whose change may significantly affect your investments. Appropriate monitoring allows you to adjust your strategy in response to these changes and their early identification will help minimize the level of risk.
Regular analysis of the investment portfolio and assessment of results in relation to the assumed goals is crucial to achieving them. If, over time, you find that your portfolio is overexposed to certain assets or sectors, you may need to rebalance, which involves adjusting the asset allocation in your portfolio to remain consistent with your investment plan.
Monitoring and adapting the established plan requires discipline from the investor. You should also remember to avoid impulsive reactions to short-term market changes and stick to your long-term plan. It is worth remembering that this process should be continued throughout the entire investment period.