Financial planning simply means planning finances to meet your future needs. There has been a lot of material based on academic research on the subject, developed over the last few decades and being used by individuals now.
The most popular and followed approach is goal-based financial planning. This simply means:
Identify a future need: It could be buying a house, planning a vacation, children's education, retirement, etc.
Measure the time: Determine how much time will be required to fulfil the need. Will it take six months, 1 year, 3 years, 5 years or 20 years?
Risk profile: Determine the ability to take risk to achieve the goal. In layman`s terms, how much loss the individual can bear for the investment to meet his need.
Once the goal or need is identified, the time period is calculated and the risk profile identified, an appropriate investment portfolio needs to be constructed for the amount saved for the goal. Individual investors should keep a few basic things in mind while selecting securities to help them achieve their goals.
Diversification: For every need, the portfolio constructed should be diversified. This probably remains the most important aspect while investing and has been proven to be right way of investing for ages. Diversification can be achieved by holding different asset classes, like equity, fixed income, real estate, gold/commodities, property, etc. One should avoid holding a single asset class portfolio as much as possible.
Liquidity: This is an important aspect one should consider while investing. A few pitfalls of not considering this: not being able to exit while the market is in for a serious fall , the investment portfolio is illiquid and the invested paper is not saleable , etc.
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