3 Steps to Setting Up an Effective Investment Plan

When you go on vacation, do you plan out how you’re going to get to your destination or do you go where your whims take you? Sure, there is some fun in taking a random road trip, but I’m talking about a trip you’ve been saving and planning for months or years. Assuming you like to plan how you get to your destinations then you have the general mindset needed to establish an investment plan.

While I’ve touched on having an investment plan in previous posts, I’m going to go a little more in-depth as to what steps you should generally follow to set up an effective plan.

Know Your Goal

When I spoke with investors in my previous life my fail safe question to start out with was to ask them what they were investing for. Were they saving for retirement, investing for college costs or was it something else? The next question was to ask them what their time horizon was in terms of when they’d begin pulling out the funds.

It is the answer to these two questions that should frame your investment plan. This should help you fully cement the length of time you need to leave your fund untouched, other than rebalancing of course, and help you focus on those needs.

Check Your Emotions

One of the biggest detractors to success for investors is that they too often make emotion-based decisions. This is understandable, but bad for your portfolio on most days. With this in mind, you need to determine what amount of loss you are comfortable with. Is it 10%, 25%, or something in between? This number should be implemented in your investment plan so you don’t sell out of your holdings prior to those losses. Some will even set stop loss orders at that number so the trade automatically triggers to the market for them.

As we all know, the stock market is erratic at best so you need to plan for that. Having this loss factor in mind will free you from constant worry and fearfully watching the stock market, and will help you focus on the long-term instead.

Include Everything

How many investment accounts do you have? If you’re like me it’s quite a few, which can make them difficult to manage at times. Your investment plan should include all of these accounts, even the random old 401ks you have floating out there.

By including all of these accounts in your investment plan you’ll be able to have a broader picture of what you’re invested in as well as a grasp on what your asset allocation is. This is incredibly vital to have as it allows you to make more informed decisions that will have less of an impact on your portfolio. While this might appear straightforward, many miss out on this key step and it only keeps them in the dark.

An Investment Plan Makes Decisions Simpler

The key benefit to an investment plan is that it is there as a guide, or roadmap, to guide what you’re doing with your investments. Think of this plan as what you refer to whenever you’re making a decision related to the stock market and it can be as simple or as thought out as you want. The benefit is that it allows you to not obsess over investment decisions as well as feel like you don’t always have to be near the computer checking in on your investments. In essence, it’s meant to simplify your life as well as allow you greater confidence that you’re on the investment course you want/need to be on.


Do you have an investment plan? If not, how do you manage your investments in the stock market?


Photo courtesy of: Lending Memo

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About John S

John Schmoll is the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. He's passionate about helping people learn from his mistakes so that they can enjoy the freedom that comes from living frugally.


  1. Having a plan is the key to investment success. When the market gets volatile (and it will) you can reflect on your investment plan and remember why you are invested the way you are. Without a plan, you are more likely to give into the emotion of the moment, which in most cases, is exactly the wrong think to do.

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