Lesson 9.5 · 5 of 5 · Beginner psychology
How to write an investment plan: goal, monthly amount, rebalancing
A written investment plan fits on one page: your goal, your time horizon, the monthly amount, your split between shares and bonds, and what you will do in a big fall. Write it while you are calm, keep it somewhere handy and reread it before any difficult decision.
Terms in this lesson
- Asset allocation
- How much of your money goes into stocks, how much into bonds and how much stays in cash.
- Rebalancing
- You bring your portfolio back to its target percentages, selling what rose and buying what lagged.
- Dollar-cost averaging (DCA)
- You invest the same amount at fixed intervals, whatever the price.
- Portfolio
- All your investments in one place: stocks, ETFs, bonds, cash.
Opening question
What goes first in your investment plan?
Your goal and time horizon shape everything else: how much risk you can take, which split you choose and how you react to falls. Fashionable shares and next month’s return say nothing about your needs.
It does not matter if you get it wrong: trying first helps you remember.
Your investment goal and time horizon
Definition
What is a time horizon?
The number of years until you will need the money.
The goal says what the money is for: retirement, a house deposit, a child’s education. The horizon says when. Money you need within 1-2 years usually doesn’t belong in shares, because a 30% fall could come at exactly that moment. Money for 10 years or more can ride out falls, because it has time to recover.
| Time horizon | Where the money usually sits |
|---|---|
| Under 2 years | Emergency fund, a savings account, short-term government bonds |
| 2-10 years | A mix of bonds and shares, with more bonds as the date gets closer |
| Over 10 years | A larger share in equities, for growth |
General guidance, not a recommendation for you. The right split also depends on how well you sleep during a fall.
Check yourself
Anna is saving for a house deposit she will need in a year. Where is the money best kept?
Over one year a 20-30% fall in shares is possible, and Anna would have no time to wait for a recovery. For money you need soon, safety matters more than return.
The monthly amount and rebalancing your portfolio
Definition
What is rebalancing?
Bringing your portfolio back to the split in your plan after the market has shifted it.
Say your plan is 70% shares and 30% bonds. After a good year for shares you might end up at 80/20, which is more risk than you chose. Rebalancing means selling a little of what has grown, or putting your monthly amount into what has fallen behind. Most people do it once a year, or when the split drifts a long way. Put the monthly amount in the plan with the transfer date, say the day after payday: that is regular investing.
Work it out
You have £10,000: £7,000 in shares and £3,000 in bonds, following a 70/30 plan. Shares fall 20% and bonds stay put. How many pounds must you move into shares to get back to 70/30?
A hint
Work out the new total first, then 70% of it.
How sure are you?
Shares fall to £5,600 and the total to £8,600. 70% of £8,600 is £6,020, so you move £420 from bonds into shares. Rebalancing has you buying after a fall without guessing anything.
Put in order
Put the parts of the plan in order, as each one depends on the last.
This exercise is in the free account, where we also save your progress.
Create a free accountWhat to do after a 20% fall
Watch out
Why write this down in advance?
Because at -20%, fear will tell you to sell.
Falls of more than 20% are not rare for shares: from peak to low, the S&P 500 fell 33.9% in 2020 and 25.4% in 2022. Write down now, while you are calm, what you will do then. For example: “I won’t sell. I’ll keep up the monthly amount. I’ll rebalance if shares drop below 60%.”
Myth or fact?
“A good plan never changes.”
This exercise is in the free account, where we also save your progress.
Create a free accountWhat would you do?
Your portfolio is down 20%. Your written plan says: “I won’t sell, I’ll keep investing £200 a month.” Some friends are selling. What do you do?
This exercise is in the free account, where we also save your progress.
Create a free accountWhat you learned
- A plan starts from your goal and horizon: what the money is for and when you need it.
- Rebalancing brings your portfolio back to your chosen split and has you buying after falls.
- Write down in advance what you will do at -20%, and keep the plan where you can find it fast.
You reached the end
Keep what you learned
With a free account we remember your lessons, bring back the questions you got wrong exactly when you need them and keep your streak.
Save your progress with a free accountLessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: the S&P 500’s 2020 fall (19 February to 23 March), from Associated Press and CNBC; the 2022 fall (3 January to 12 October), from MarketBeat (8 June 2023). The rebalancing sum is an example with round numbers.