In the first installment of the Five-Year Plan series from Jason Hartman, we examined the dynamics of creating a five-year plan for investors at various points in their personal path. The dynamics of investment decisions differ greatly for new investors, growing investors, and people who are on the short-path to retirement. The important factors that come into play are a trade-off between an investor’s desire for returns relative to their appetite for risk.
What we saw from the first level of analysis is that the decisions you make are greatly impacted by where you are in your career, and the level of risk and volatility that you can comfortably maintain. As we are looking the future of our investing careers, there are additional factors that people need to consider.
In building a personal five-year plan, there are a series of steps that we should undertake in order to ensure that the next five years transpire in a manner that will move us toward our personal, professional, and financial goals. These steps are to define a clear five-year vision, break that goal into small actionable steps, change your thinking from “products” to a “portfolio” and to build that portfolio based on the investment value vectors.
Define a Clear Five-Year Vision
The importance of defining a clear goal for the next five years of your investing career cannot be over-stated. The reason for this is because it defines the point where you are headed with every decision that you make. It is not necessarily a matter of forecasting the exact state of your life in five years, but in setting a vision for what you would like your life to look like after five years have passed.
Break the Five-Year Vision into Small, Actionable Steps
Once your five-year vision has been formed, it serves as the “true north” for navigating the next steps of your investing career. The path toward your vision comes from small steps that can be taken to move you steadily forward with consistent, focused action. The way that seemingly large goals are accomplished is by steadily moving toward your vision.
Think “Portfolio” vs. “Products”
An important concept for investors to take into consideration is the notion of a portfolio. Most people think about investment products by themselves, independent of one another. However, when we combine all of our investments together, they form a portfolio.
It is important to understand that our portfolio will develop different characteristics than the individual investments that it contains. Bearing this in mind, we should select investments based on how they will influence our portfolio.
Individual investments vary quite significantly in the way that they perform. Some are more volatile, and some are more stable. Some have the potential for high appreciation, while others produce consistent cash flows. When combined together into a portfolio, some of the risks will counteract one another. Many people intentionally combine their investments together in a portfolio so that the net result will be more stable than the individual pieces are on their own.
Investment Value Vectors
When selecting the investments we will pursue, there are multiple value vectors that we must consider. One vector is the returns that an investment can offer. Another vector is the level of volatility. A third vector is the level of time required to pursue the investment opportunity.
Some investments such as real estate flips, growth stocks, and gold / metals offer the potential for high returns, along with high volatility, and require a high time investment.
Other investments such as insurance policies and bonds require a much more modest time investment, and offer modest returns. Dividend stocks typically carry a somewhat higher level of risk along with higher returns, while still maintaining a modest time requirement.
o Alternatively, investments such as single family and multi-family income properties require a higher level of time commitment, still generate high rates of return, and possess a more middle of the road volatility profile.
The importance of contrasting these investment characteristics is to define and understand them so that we can deploy them in the construction of our own portfolio. It is also important that we understand the underlying dynamics of investments in each of the categories that we use to build our own path to success. In the end, our five-year plan comes down to developing the knowledge, ability, and willingness to define our vision and then take the actions that are necessary to turn that vision into reality.
Action Item: Build your personal five-year vision, and use it as a compass to guide your investment decisions. These decisions should be moving you toward a portfolio that supports your vision.
The Jason Hartman Team
