How to Develop a Sound Investment Plan

In this article I will discuss the process which can help you to develop a sound investment plan. The steps are as follows:

Lay down your objective
A sound investment plan starts with a sound objective. Ask yourself why you want to invest? What purpose will the money solve in future? Lay down your financial goals before you start investing. Different individuals have different reasons to invest. But all of them invest for the unforeseen circumstances, for retirement, to support their child education in future.

Calculate your risk taking capacity
Once you have your objective in your mind, find out your risk taking capacity. This is important because different securities available in the financial market carry different amount of risk. Life comes with different types of responsibilities and you can't just risk your hard earned money in some risky securities just to earn few more dollars. So, calculate your risk and invest wisely to build up your money. for this subtract your age from your retirement age. This will give you the amount of risk you can take.

Find out the different types of securities
There are many. You can invest in stocks, bonds, mutual funds, insurance, certificate of deposit, commodities, government bonds, real estate and securities which have inflation protection feature.

Prepare a portfolio
You can call portfolio a small bag which carries different type of securities in a certain proportion. A portfolio helps you to diversify the risk. A combination of different type of high risk and low risk financial instrument help you to reduce the risk and earn a high return. How does this work? The losses from one security are covered up by the gain from another one. This is the concept on which the portfolio works.

Rules for investment

Rule 1
Higher the return, higher is the risk. Therefore evaluate the risk of the security carefully and calculate the long term return that the security will earn for you. Invest wisely. Also make sure that the real returns that you earn from the security are higher than the inflation rates. look at the past trends of the stocks and securities before investing.

Rule 2
Hold at least ten percent of your portfolio in gold. Gold is an excellent inflation hedge. It provides you with liquidity as well as the returns.

Rule 3
Mix different securities in certain proportion so that you hold different types of securities and increase the return over time. Make sure that you evaluate your portfolio in every three or four month and make the changes so that you avoid heavy losses and improve the returns.

Rule 4
Practice some patience. Money does not multiply overnight. It takes some time. It is seen that most of the securities are profitable and earn desirable return in the long run.

Investment helps you to increase your asset, make your money grow and help you to tide away those difficult times. To make your investment successful you have to practice a little patience and give take a systematic well managed approach so that you achieve your financial aim and lead a prosperous life.