Do you have an investment plan? Do you know what an investment plan is? Did you know that an investment plan can save you $1,000’s and keep you sane during a downturn?
Why do you need an investment plan?
Having an investment plan is critical for every investor because we’re not always the rational, logical, disciplined investors we’d like to be. We’re emotional. We fear loss. We suffer from behavioural traps.
The performance of individual investors has been repeatedly shown to lag the index they invest in.
Investing is risky. That’s the price you pay in exchange for higher returns.
If you wanted zero risk you’d put your money in high interest savings account. But then your returns wouldn’t even keep up with inflation. Over the long run, a no risk investment is essentially losing money because its worth less and less each year.
Buying bonds offer a slightly higher return, usually above inflation, but that comes with additional risk. Bond prices are sensitive to interest rates and the economy. There is also the risk of default.
Equities provide an even higher return. This is exchange for much higher risk.
So how do you go about reducing your risk for little to no cost? First let’s discuss exactly what we mean by risk.
Banks are biased. That’s obvious. Banks are public companies in the business of making money and therefore are biased towards activities that produce a profit. This isn’t necessarily a bad thing but when making personal finance decisions it’s good to keep this top of mind.
This bias is especially apparent when banks advertise their mutual funds. They use a few different forms of bias to make their products look extra appealing.
Everyone has probably seen a mutual fund advertisement. It’s the one with the line that keeps growing towards the sky. It usually says how $10,000 invested 10 years ago could have grown into $xxx,xxx today.
There are a couple of problems with this advertisement.