Investment Planning: The Series

This post has been cited by the 98th Carnival of Financial Planning hosted by Living Almost Large.

Welcome to my 2009 summer project. Over the next two months or so I will be posting a series on investment planning. Since this is one of the core personal finance topics there is a lot already written about it elsewhere, and many online tools exist to facilitate investment planning calculations. This series complements these other resources. Yes, to a large extent I will be reinventing the wheel. But it will be my wheel, crafted in my way and, thus, ever so slightly different from the other wheels. Hopefully it will not be too wobbly a wheel. If it is, I urge you to help improve its performance with your comments. That will make it a little bit your wheel too.

In this series I will build an investment planning approach using only logic and simple math. As you will see, this will take us quite far. However, it cannot take us all the way to a full investment plan. In the final step objective logic and simple math alone prove insufficient and one must apply personal taste with the guidance of other resources to which I will link.

However, subjective decisions made to complete one’s plan can and should be made in ways that are consistent with the logic of prior steps. And certainly one need not apply arbitrary rules to the entire investment planning process. Doing so misses some very critical points and invites unnecessary risk. To be blunt, I am unimpressed with rules-of-thumb like “invest your age in bonds,” “90% equity is sensible if you’re very young,” and so on. They may be inconsistent with the demands of one’s personal situation—demands that can be quantified easily, as I will show.

There is one important note of caution that I will make here and not reiterate in the series’ posts. Long-range investment planning (e.g. for retirement) is based on assumptions about the future that are almost certainly wrong. Therefore, the quality of the outcome depends on a sound plan and more importantly on revisiting and updating the plan to reflect the degree to which reality deviates from assumptions. Another key method for protecting oneself from the down-side consequences of inevitable modeling errors in long-range planning is to build in a conservative margin for error. To keep things simple in this series I will ignore these points, having made them here. Yet, they are crucial.

I am sure most readers of this blog have read and perhaps written about investment planning before and have some thoughts to share. My summer assignment to those readers is an invitation to send me your thoughts on investment planning or your reaction to this series or elements thereof. The conclusion of the series will be a post that includes your comments and any tips, tricks, and links you provide. (I will credit you as directed or not at all if you request anonymity). You can either post a comment to one of the articles in this series or send me one using the contact form.

Since household budgeting is intimately related to my approach to investment planning the series begins with, and later returns to, budgeting. Here’s the list of upcoming post titles. Expect one post per week.

1. Investment Planning: The Series [this post]
2. Household Budgeting the Easy Way
3. Budget Tracking and Projections (with Quicken Tricks)
4. Willingness, Ability, and Need
5. Estimating a Retirement Budget
6. Need for Risk: The Details
7. Multi-Period Planning and Asset Allocation
8. Investment Planning: Reader Tips, Tricks, and Links