How to invest money is probably the most asked question in the investment world. But I reckon a lot of investing is done mostly in a pretty ad-hoc manner. For example, how many of us have seen an advertisement or article for an upcoming IPO. And it just so happens that not only do we know the company but we also use their products.

So we get hold of the application and it seems pretty easy to fill out; name, address, bank details, a direct debit authority to your bank account, and hey presto you’re suddenly a share investor. Sound familiar?

Or what about that great investment tip from a friend or work colleague. They’ve got ‘inside’ info about a company’s impending oil strike. This is definitely a ground floor opportunity, not to be missed at any cost. And before you can say ‘open an online trading account” you’re suddenly in the oil business!

Now there are plenty of other ways we can find ourselves as shareholders and few if any are the results of a long-term investment plan.

Oh, by the way, I see absolutely no problem with going about your wealth accumulation in this ad hoc way. In fact, there are many people who have built a decent nest egg just from participating in the different Government floats of the 1990’s.

However, I have also seen many failures where ‘hope’ was the investment strategy and research was merely talking to someone who heard it from someone else. Usually, investing done this way is not destined for the long-term.

The first major trouble in markets sends a shiver down the investor’s spine and the fear of losing money suddenly takes over. “Sell those bloody shares before we lose it all” is the call from their partner. But there’s no need for these instructions because they already have. And the ‘planned’ long- term investment has lasted about 4 months. and sworn off any future investing!

How to invest money – do we really need a plan?

As the saying goes, ‘you don’t plan to fail, you just failed to plan’. So to be a genuine long-term investor, it is important to fully work through what you want to do and how you’re going to do it.

And for good measure, formulate a contingency plan for the times when things start to turn ‘pear- shaped’.

I guarantee you that it is far more sensible to have your plan B thought through during a period of calm than at a time when it feels like the investment world is about to end.

So let’s look at the steps of how you can invest money and become a successful long-term investor.

How to invest money – The seven steps to successful investment planning

How to invest money – Allocating Investment Funds

Okay, let’s start with some non-rocket science; long-term investment is exactly what it say’s on the ‘packet’ – investing for a long-term.

For an investment to succeed it needs time, and that means you don’t sell-out at the first sign of ‘trouble’ nor do you suddenly sell to pay for the phone bill you forgot to budget for. Be sure the funds you are using are separate from the family budget and totally left alone for any other purpose (alright, dire emergencies accepted).

Starting with $500 is all you need, but it has to be 100% available and dedicated to nothing else but your investment program.

Have a look at this post. It will show you in detail how to free up investment funds within the family budget.

Now as an old adviser it would be remiss of me to mention the word investment without mentioning risk management. Any investment program you embark upon requires your personal money circumstances to stay as is. This guarantees your ability to stay the ‘distance’ with your investment program.

So it’s also a good idea to have your personal insurances in order. Sudden illnesses or accidents can interrupt just about anything to do with money. But if you have adequate insurance cover in place, you keep going as normal. Here’s a post on how to calculate the right amount of cover, be sure to have a look.

Step 2:  Establishing investment goals

The next step is to decide on the reason you are investing. This is your goal and everything you do from now on is done to achieve it. As I mentioned earlier, ad-hoc investing can be okay. But if you haven’t made absolutely certain of your goals it can be very easy to bail out. Success only comes when you stay invested no matter what. I can’t emphasise this point enough.

Now I know the danger of assuming, but I reckon anyone reading this, is definitely looking at building wealth over a long-term. So it stands to reason that your goal is obviously going to show this.

But your goal needn’t be about just accumulating as much as possible. You might set a goal to accumulate enough income-producing investments for an earlier retirement. Or maybe to create a diversified investment portfolio to provide future benefits for your kids.

So whatever your aim, just give it plenty of thought, and make sure you write it down.

Step 3:  Create your investment plan

Okay, you now have your key investment goal(s). It’s now time to prepare how you are going to reach them. Remember, you’re drawing the blueprint to build your ‘fortune’, so be precise and research it thoroughly.

Investment strategies are really the choice of investment vehicle that will get you to your goal.

To really nail down what you want to do, make sure you add plenty of detail to your goals. Quantify amounts, add milestone and completion dates; be very specific.

Don’t neglect details such as what type of investment risks are you willing to take, or your preferred investment types. Also any investments you don’t want.

For example, do you want to restrict yourself only to the top 100 companies on your local stock exchange? Or maybe the top 100 companies globally, or to just share’s with a record of dividends?

If a property is one of your investment strategies, what type? What geographic area’s are you happy with? Do you prefer units or houses? Renovation potential or new? There are certainly lot’s of choices, but a good plan has detail.

And as with all good plans, make sure you build in review times so you can check on your progress. And don’t forget your contingency plans, when and if they are required. Put in writing the types of actions you will take when markets drop by 10%, 20% 30% and so on.

There is absolutely no predicting how much a market will fall at any given time but it is important to have developed some idea of how you want to react.

Step 4:  Evaluating investment vehicles

This is the step where you are going to be evaluating your preferred investment vehicles. For me, I have a strong leaning towards share investment. There are plenty of options for diversification, they are a very low cost to enter and exit and very easy to liquidate should I need money. Of course, the selection of assets is your choice only. So do your research and look at different risk/return factors across a range of investments.

It is very important during this part of the plan that you become aware of your risk appetite. You really need to be able to identify exactly the amount of risk you are willing to take. It is then a matter of determining how best that risk can be mitigated in a well-constructed portfolio. You must be comfortable with your investments and they certainly need to be selected by being able to meet your goals.

Step 5:  Selecting your investments

This is where you drill down into specific investment candidates to see if they are suitable for your portfolio. Remember you are planning how you invest your money, not someone else’s. So do your due diligence on potential companies by looking at fundamental factors such as EPS, PE, ROE and all the other groups of letters.

You should be assessing prospective companies about how they suit your risk profile, dividend his- tory, consistent growth or whatever other parameters you have created within your investment plan. Don’t deviate from the plan at this point.

Step 6: Constructing the portfolio

To achieve investment goals you will need to build a portfolio of suitable investments. Diversification is the key point here, as this will be the major method of mitigating risk and providing the best returns for the risk that you are taking. Diversification is simply not putting all your eggs in the one basket, so you need to select a variety of investments for inclusion in the portfolio.

There is no absolute rule when diversifying your portfolio, although there is certainly much academic research given to this topic. Quite simply, if you have a $1,000 to invest it is obviously prudent to spread this across two companies’ shares, $500 in each, and not all in the one company. By splitting the funds you have reduced your risk through diversification.

Step 7:  Managing your portfolio

All good so far and now it’s time to keep an eye on your investments. You will need to create regular times to manage and measure the performance of the individual components within the portfolio. You will need to decide whether they are living up to your expectations. Now, a long-term investment ethos does not mean sticking with a particular company during thick or thin.

Rather, long-term investing should be when you remain committed but are also ready to jettison poor-performing assets. It is important though not to jump to any hasty decisions so make sure you ignore short-term data and normal market gyrations when doing your analysis.

So there you have it, the first step in how to invest your money. All you have to do now is to start turning it into reality. Think through your goals and aspirations; look at your time frames and your stage of life. $500 is all you need to create a successful and fruitful long-term investment plan that will truly benefit you and your family.

Thanks for reading, please add any questions or comments below, see you next time. Home

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