Creating a Financial Plan 2 – The Investing Plan

“Investing with a plan gives purpose to your portfolio.”

Creating an Investing Plan comes second in the process of creating a financial plan for two reasons:

  1. It runs in the background. You can get your investing plan running and working for you while you work on the other elements of your financial plan.
  2. It determines many other areas of planning. How you decide to invest will influence, if not determine, how other areas of planning are completed.

Before we create the Investing Plan, let’s look at two important precursors: The Purpose of Investing and the Drivers of Lifetime Investor Success

The Purpose of Investing

The goal of investing is to fund your other life goals. It is not to beat an arbitrary benchmark (though you may). It is not to outperform your friends and peers (though if you follow an investing plan and they do not, you almost certainly will). 

Any goal that you do not plan on paying for with earned income will be funded with investments. Therefore it is important to identify the purpose of investing before you begin. And the purpose is not paying the lowest fees or outperforming the S&P 500.

To wit: If you did pay the lowest fees and “outperformed the market” with your retirement investing, but you still ran out of funds in retirement, then you have failed. 

The purpose of investing is to fund your other goals. Be crystal clear on that fact, and what those other goals are.

The Drivers of Lifetime Investor Success

Let’s look closely at that subtitle in reverse order:

  • Success – Achieving one’s goals.
  • Investor – The returns you get as an investor, not what the stock market got in general. 
  • Lifetime – Not this quarter or year.
  • Drivers – Those things we can influence to drive the other three (i.e. not global economics).

Here are the Drivers of Lifetime Investor Success


RetireMentorship covered this at length in Episode 1 – Investor vs. Investment Returns. If you do not understand and control this, nothing else matters. This driver is in a league of it’s own. It has the biggest impact on your returns, and it the piece you have the most control over. Go listen to Episode 1 if you haven’t yet. It’s number one for a reason. 

Behavior is so overriding of any other driver, that for the next five, we are going to hold behavior constant at perfect. That is, we are going to assume that the investor never once falls to any of the Four Horsemen, and is perfect in their behavior (easier said than done). 

Asset Allocation: 75%

Making up the vast majority of your lifetime investor success is the percentage of your portfolio you had allocated to Equities instead of Fixed Income. The more equities over your accumulating lifetime that you hold, the better your returns and the better your overall investor success. And, to a point, having more equities in retirement is better than having fewer. ( See Retirement Planning in an upcoming episode.)

Diversification & Rebalancing: 10%

If Asset Allocation is the percentage you have between equities and fixed income (it is), then Diversification is the mix within equities or fixed income. Having 90% of your portfolio in equities gives you a 90/10 asset allocation. Having 33% each in small cap, mid cap, and large cap mutual funds is your diversification within equities. 

Rebalancing is returning your mix to the starting percentages after a period of time. For example, if your plan called for quarterly rebalancing, and your asset allocation and diversification mix was as above, then at rebalancing you would return your portfolio to 90% equities, and inside the equities return to 33% in each of the funds. This entails selling the ones that have done well, and investing those gains in the ones that have done “poorly” over that period of time. 

A good diversification mix, coupled with rebalancing, has historically and will mathematically produce superior returns. This is not guaranteed, of course. But the principal is that you have several funds that have fluctuate at different rates, and you are systematically selling high and buying low with rebalancing. This is not the same as timing the market. Rebalancing happens systematically and, ideally, automatically regardless of what the market is doing. 

Taxation: 10%

Taxes are the largest expense of your life, and if you’re not carefully, they will take a large chunk out of your investments. This will be covered in Tax Planning to come. 

Fees: 4%

Fees will also take a byte out of your lifetime returns. When all else is held equal, fees should be minimized. Take special care to reduce or eliminate any fees that are not adding value to you. But be careful not to fall into the fee-trap: counting the impact of fees too high. Many people become so fee averse that they always seek the cheapest option, regardless of value, loose out on better lifetime returns because of it. 

Fees play a role. But note that it is perhaps 4% of your lifetime returns. This does not mean that your lifetime returns will be 4% higher if you eliminate all fees. It means that proper management of the fee-to-value equation could result in 4% higher lifetime results. 

Selection/Timing/Everything Else: 1%

Everything else may amount to 1% change in lifetime returns.

Spend your time and energy controlling the 99%, rather than focusing on the 1% which you have little to no control over. You have just as much of a chance of being on the positive side of that 1% difference as on the negative by ignoring it completely. And choosing to focus on it jeopardizes the overarching concern: behavior.

(Example: focusing too much on trying to select the best growth fund may cause you to chase returns (The First Horseman), and can easily result in lower returns that if you stuck with the first option.)

Keeping the Purpose of Investing in focus, and with an eye on the Drivers of Lifetime Investor Success, let’s look at the Seven Steps of Creating a Investing Plan

The Seven Steps of Creating an Investing Plan 

NOTE: This is NOT investment advice. Seek a professional for one-on-one investment advice. 

There are Seven Steps to Creating an Investing Plan

1. Adopt a Planning Mindset

You must be all-in on the belief that Lifetime Investor Success comes from forming and following an investment plan. Not in picking the best funds or timing the market. 

You must Gain the Right Knowledge

You must Build and Bolster Belief in your plan.

You must be perfect in your behavior and slay the Four Horseman.

2. Identify the Purpose

What is the goal we are trying to fund? Retirement? College? Cabin or dream home? We must know the purpose. And we must identify it on two dimensions: A Date Specific, Dollar Specific Goal. We need to know the timeline for the goal; the “when”. And we need to know the amount for the the goal; the “How much.” Only then can we move to step three.

3. Determine the Asset Allocation and Schedule

Again, NOT investment advice.

If you are more than 10 years out from the goal, there is no reason you shouldnt’ be 100% equities.

At 10 years out, you should have formulated a schedule for reducing the amount you have in equities, and/or be willing to adjust your timeline. 

For a retirement goal, you should end out around 80% equities and 20% fixed income. This is far heavier on equities than the conventional mantra of between 40-60% equities. For more details, stay tuned for the Retirement Planning episode. 

4. Determine Diversification Mix

Your Equities and Fixed income should be spread out inside of those classes for security and potentially better returns. Pick a mix and stick with it. 

5. Determine Rebalancing Strategy

How often are you going to rebalance? And to what percentages? Systematic rebalancing should improve returns over the long-term. 

6. Minimize Taxes and Fee

We will cover taxes in Tax Planning. See to pay fees only in areas where you are receiving value. Everything else being equal, choose lower fees. 

7. Execute & Evaluate

All this knowledge is useless if you don’t execute and take action on your investment plan. Create the plan, reallocate your investments according to it, and stick to the plan.

Then evaluate. Mostly evaluate step 2. Have your goals changed? Then maybe your portfolio should change. Goals are the same? Then there is likely no need to change the plan. 

If you need help creating an investment plan, or would don’t want the weight of these decisions solely on your shoulders, we can help. But don’t delay. Create and act on an investment plan yourself, or hire someone to do it for you. Email us at Team@LaxFP.com if you’d like help from us. Otherwise at the end of the process we’ll tell you how to find a Financial Planner who would be a good fit for you. 

Stay tuned for the next step in the Financial Planning Process!

This article is educational only and is not intended to be investment, legal, or tax advice or recommendations, whether direct or incidental. Again, this is not investment advice. Consult your financial, tax, and legal professionals for specific advice related to your specific situation. Never take investment advice from someone who doesn’t know you and your specific situation. All opinions expressed in this article are the opinions of the people expressing them. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.