In today’s unpredictable economic environment, making wise investment decisions is critical to cushioning individuals and organizations against the adverse effects of this unpredictability. According to Ilmanen and Sullivan (2017), one of its significance is that it allows people to efficiently manage their income in a disciplined manner as it provides a roadmap on what to spend, save and invest. Investment planning also enables individuals to gain a financial understanding of their current situation ( Kirchler, Lindner & Weitzel, 2018).
Steps of Kathy’s Retirement Planning
For Kathy to be in a position to meet and surpass her financial goals, she needs a solid retirement plan that will allow her to consider which investment vehicles best suites her situation. The retirement planning phases include:-
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Figure 1: Steps of Retirement Planning
Source: Ilmanen and Sullivan (2017).
Find when and how much you are saving
The first step is to determine the period within which one is expecting funds and the proportion they are willing to save. The timing of salary payment needs to be considered to avoid unnecessary spending during certain times such as the festive season. Regardless of the amount of income, savings are vital in taking care of retirement needs and emergencies.
Set your financial goals
The second step is to determine both long-term and short-term goals. Kathy should establish her financial objectives. From a summary of her current situation, it is evident that she needs a retirement plan that will cater for the credit card arrears, mortgage and childcare. In setting the financial goals, it is critical to identify clearly defined objectives so that they can be easily understood and executed.
Analyze your risk taking ability
Evaluating one’s financial risks is important depending on income. Typically, individuals who have just received their first salary are more likely to take fewer risks compared to their counterparts who have established revenue streams. The latter has a higher appetite for risks and should invest in high-risk investment options such as index stocks.
Create a savings portfolio
The next step involves the establishment of a savings portfolio which should be diversified. Kathy has several financial needs and a well-crafted savings profile comprising of stocks and mutual funds will allow her to have a secure retirement. The main aim of a diversified portfolio is to spread out the risks associated with the different investment instruments.
Learn about all investment options
Within the financial markets, there is a variety of investment options that should be considered before deciding to invest. For the case of Kathy, she needs to research online for the available investment vehicles, identify the various risks associated with each of them and the expected returns.
Calculate your asset allocation
After evaluating the risks and returns of each of the available investment tools, the next stage is to create an asset allocation plan using different asset classes. The assets should then be apportioned in a manner that accomplishes optimal diversification besides aiming at the anticipated returns.
Know how to build your portfolio
The last step involves putting the investment plan into action. After the funds have been invested in different tools, it is imperative to routinely track the performance of the portfolio. According to most investment advisors, this should be conducted on a quarterly basis while the overall performance review needs to be done annually. The main objective of this action is to determine whether the investment is in line with the investor’s goals.
The Preferred Investment Strategy
The income investing strategy would suit the needs of Kathy largely because she is about to retire and needs supplementary revenue streams to handle the various living expenses. According to Kirchler et al., (2018), this approach allows investors to optimize their annual income through the generation of liquid cash. One such options that Kathy can consider is investing in stocks which will in turn pay out dividends periodically. Given that she earns an annual salary of $70000, she can opt to invest 25% of this income in dividend-paying stocks and 15 % in a mutual fund as a means of creating an income-based portfolio.
The Risks and Rewards of Investing
Risk and reward are interlinked, and hence, risk is intrinsic in all investment instruments ( Ilmanen & Sullivan, 2017). One of the major investment risks that Kathy should consider is volatility which signifies a fluctuation of unit prices of a portfolio over a certain period of time. Kirchler et al., (2018) note that such changes in the market conditions could reduce the overall returns of investments. Poor timing in terms of investing is another risk that could affect a portfolio. Since the prediction of future prices is challenging, the risk is that one could buy a stock at a high price and sell it at a much lower price ( Ilmanen & Sullivan, 2017). Investing has several rewards including consistent wealth creation, mitigating the effects of inflation and enables investors to save on taxes.
Minimizing the Impacts of Investing Risk
Diversification of portfolios is a sure way of minimizing the associated investment risks. By having well-balanced assets, the investor is guaranteed rewards from the investment in case one of the portfolios is negatively affected by elements such as volatility ( Ilmanen & Sullivan, 2017). One can also reduce this risk by investing in portfolios with steadily growing dividends.
Resources that can assist in Learning about Investments and Retirement Planning and how they can help
The Financial Industry Regulatory Authority reports are major resources that can help Kathy understand more about making wise investment decision. The periodic publications of this body offer investment expertise and insights on market intelligence ( Kirchler et al., 2018). Additionally, Motley Fool is an online resource that consists of a community of investors who offer free investment insights on a wide range of issues around retirement and investment planning ( Kirchler et al., 2018).
References
Ilmanen, A., & Sullivan, R. N. (2017). Defined Contribution Retirement Plans Should Look and Feel More Like Defined Benefit Plans. The Journal of Portfolio Management , 43 (2), 61-76.
Kirchler, M., Lindner, F., & Weitzel, U. (2018). Rankings and risk ‐ taking in the finance industry. The Journal of Finance , 73 (5), 2271-2302.
