Thursday, February 4, 2010

Building a sound financial plan

At times, investors may be tempted to follow investment trends and buy the latest financial products. But it is not an advisable way of financial planning. These flavour-of-the month distractions could divert your attention from achieving your financial goals. To ensure that you stay on track, remember to keep in mind the basic principles of financial planning so that your investment plan can help deliver your financial objectives.

5 useful principles to remember

Set realistic goals, time frames and expectations

  • Be realistic about the goals you want to achieve. If you cannot afford to buy your dream house within a short time frame without taking undue risks in your investments, extend the time period for building your wealth to purchase the property.
  • You should also be realistic about investment returns and inflation rates. If returns on global bonds have been approximately 4%-5% over the long term, do not over estimate the figure.
Know your risk tolerance level

  • Access your financial situation and future needs each time you are considering a financial investment, to see if you are willing and able to take risks.
  • You should determine the type of investments based on your tolerance for risk. For example, if you can take some investment risks, you may consider investing in more aggressive products like single country and single sector funds.
Ensure adequate protection
  • It is important to have life protection regardless of the life stage you are in. Basic life protection plans such as whole-life or term insurance plans can help to provide financial protection in the event of death, disability or critical illness.
  • Wealth protection is important, especially if you are saving for your own retirement. Capital protected products, good quality bonds and endowment plans tend to be lower risk, so they can help to preserve your wealth.
Diversify your investments

  • Diversification helps to spread risk. Different asset classes like equities and bonds perform differently. For example, equities have low correlation to bonds. By spreading your investments across different asset classes, you are less likely to suffer a significant drop in the value of your investments should a particular asset class fare poorly.
  • Take into consideration your current life stage and your appetite for risk when choosing your investments. Generally, as you approach retirement, you should reduce your exposure to risky investments.
Review your financial plan

  • Review your financial plan regularly to check if your plan is on track to meet your objectives. Once a year is generally recommended.
  • You should also review your plan if there is a change in your financial situation or as you enter a key milestone in your life, for example, getting married or having your first child.

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