The 7 principles of an investing plan

Save. Invest. Repeat.

These three steps are the building blocks for reaching your financial dreams. Just like any big goal, it doesn’t happen overnight. It takes time, regular effort and a good plan. The same goes for investing.

A regular investment plan helps you make investing a habit so you can stay on track to achieve your financial goals without getting distracted by scary headlines or the market’s ups and downs.

But what does it mean to invest regularly? How can you make a plan that works for you? We’ll walk you through the important steps to creating a plan that works for you and explore how ETFs are a smart choice for this strategy.

Key principles of regular investing

Having a regular investing plan is an easy and popular way to save money and grow your wealth. It means putting aside a certain amount of money to invest regularly, like every week, fortnight or once a month.

Some investors prefer to invest fortnightly or monthly, aligning their investments with their pay schedule.

There’s no right or wrong answer for how often you invest – the key is to do it regularly. Think of an investment plan like a workout plan. Just like exercise routines are based on your goals, an investment plan is shaped by what works best for you.

Let’s now explore the key principles of effective regular investing.

1. Decide how much to invest – and stick to it

The first key to success with a regular investment plan is deciding on a contribution amount that’s both affordable and sustainable. Whether it’s $50 or $500 a month, staying consistent with your contributions allows compounding to do its work over time.

It can be tempting to change your investment amount based on market ups and downs, but as discussed in our blog on why market timing is a fool’s errand, consistently predicting market movements – whether in the short term or long term – is nearly impossible. The market can fall and recover in the blink of an eye.

That’s why it’s essential to stick to your strategy and resist the urge to think, “I’ll invest a little less or skip investing this month because the market is down.”

2. By maintaining your fixed contribution and avoiding the temptation to sell, you allow the power of compounding to work in your favour over time. Consider the costs

Regular investing will come with costs, such as management fees (if you’re investing in ETFs) and transaction fees or brokerage commissions.

For example, a $100 trade for shares or ETFs at some online brokers could cost between $4.95 and $9.95, effectively taking roughly 5-10% out of your investment right away. Over the course of a year, these fees can add up to hundreds of dollars.

If you’re investing in ETFs you also need to consider the fees and costs that are changed, such as management costs. These fees are usually charged as a percentage of your total investment value and are deducted automatically. Management costs can vary significantly from one ETF to another.

That’s why you want to perform a cost-benefit analysis and work out how much money is worth investing, how often, based on the cost of doing so, and consider alternatives that can support low-cost regular investing.

If you plan to stick to ETFs, then solutions like Betashares Direct can help lower the cost of investing as there is no brokerage for any ASX-traded ETF*. You can also set recurring orders into up to 5 Betashares ETFs with auto-invest, making it easier to manage regular contributions.

*Refer to the PDS for information on interest retained by Betashares on cash balances and portfolio fees associated with Managed Portfolios.

3. Determine your strategic asset allocation

Strategic asset allocation (SAA) is a way to spread your money across different types of investments, like stocks, bonds, metals, real estate and cash, based on your goals and how much risk you can handle.

By deciding how much to invest in each type, SAA helps you stick to your plan and avoid making quick, emotional decisions. This way, you can stay focused on your long-term goals and the amount of risk you’re comfortable with.

Some illustrative examples include:

• Growth to High Growth: Shares may range from around 70% to 90%, with defensive assets (such as cash and fixed income) ranging from 10 to 30% shares – Shares offer the potential for higher returns, but with higher risk. A growth to high growth allocation involves taking on higher risk, which may be suitable for someone with a longer investment timeline of 7 years or more
• Balanced: Shares may be around 50% shares, with cash and fixed income around 50% – This allocation has higher exposure to fixed income. Fixed income securities such as bonds play an important part in diversifying your portfolio and helping to balance the risk of your growth assets. The investment timeframe is around 5 to 7 years.
• Conservative: Shares may range from around 20% to 30%, with cash and fixed income ranging from around 70% to 80% – This allocation reflects a more defensive strategy for investors comfortable with moderate returns, with a greater focus on capital preservation. The investment timeframe is around 3 to 5 years.

Once you’ve decided on an asset allocation, the next step is to determine the specific investments within each ‘bucket’. For instance, how much of your share portfolio will be allocated to Australian equities versus international stocks?

4. Assess investment options

After figuring out your SAA and how much to invest in each category, the next step is to pick specific investments. If you plan to buy individual companies, then this part will likely take the most amount of time. That’s because:

• Analysing individual stocks can be time-consuming and you have to keep checking how they’re doing. Plus, if you buy shares in many different companies, the brokerage fees can add up quickly.
• On the other hand, ETFs let you invest in wide markets and sectors, making it easier and more efficient to grow your money without the stress. You’ll also need investigate the costs involved in investing in particular ETFs.

For example, a portfolio with holdings in A200 Australia 200 ETF , BGBL Global Shares ETF , and OZBD Australian Composite Bond ETF can help provide core exposures to both Australian and international equities, as well as fixed income.

But if you want to avoid the hassle of reviewing your SAA and regular rebalancing your portfolio, you can turn to diversified funds. ETFs like DHHF Diversified All Growth ETF and DBBF Ethical Diversified Balanced ETF offer a simple way to achieve diversified exposure all at once, without doing everything yourself.

5. Decide on what to do with distributions

Once you’ve chosen your investments, whether they’re shares, ETFs or a mix of both, you’ll need to decide what to do with any dividends.

Getting paid in cash can boost your cash flow, giving you more money to use right away. However, this means there is less money in your portfolio growing over time, which can reduce your long-term returns.

On the other hand, reinvesting your dividends or distributions from an ETF via a distribution reinvestment plan (DRP) is a smart way to help your compound quicker. Instead of taking cash, you use those payments to buy more shares or ETF units, allowing both your original investment and the reinvested amounts to grow together.

6. Undertake regular rebalancing

If you don’t invest in a diversified fund or a managed portfolio with automatic rebalancing, you’ll need to manage rebalancing yourself. Over time, different investments will perform differently, causing your portfolio to drift away from your original SAA targets.

An investing plan is a great way to assist with rebalancing since you can easily allocate funds toward assets that are underperforming compared to others in your portfolio. This helps bring your portfolio back in line with your target allocations and stay within your preferred risk-return profile.

Conclusion

A regular investment plan is a fantastic way to help you build wealth and achieve your financial goals. When you stick to a regular investment plan, you can take advantage of compound interest and not worry about trying to guess the best times to invest.

With good planning – like deciding how much to invest, picking the right investments and managing your dividends – can make your financial journey easier, encouraging you to save regularly and help you stay focused so you can stay on track to reach your financial goals.