6 Important Financial Instruments to Make Your Financial Plan a Success - WiserAdvisor - Blog (2024)

Decades ago, investors primarily relied on limited financial instruments like bonds and stocks to constitute their portfolio. However, with the advancement of time, investing options have amplified manifold. Today, there is no shortage of financial instruments. But with multiple options, the complexity and confusion have also heightened. In such situations, finding the right investment instruments is critical. A strong and well-balanced portfolio helps you earn higher returns, mitigate risk, and substantially accumulate wealth over time to achieve your monetary goals.

Here are 6 important financial instruments tools to make your financial plan a success:

1. Individual stocks

A stock represents your ownership in a company. Stocks offer one of the highest potential returns on your money, while simultaneously exposing you to the highest level of risk. But when placed adequately in a portfolio, stocks can help provide the much-needed boost to your savings in the long-run. Stocks are the perfect option for you if you have a well-diversified portfolio but can potentially take on some risk to increase returns. However, as a good rule of thumb, it is advisable to reduce your allocation into stocks with age. Age-based equity allocation helps you to balance risk and reward with each stage of life.Ideally, the best way to know the adequate percentage of equity allocation is to subtract your age by 100. For example, if you are 40 years old, you could allocate 60% in equity and the rest in more stable market instruments. That said, as you approach the age of retirement, you would need to restructure your portfolio to include approximately 35% in stocks and the remainder in more stable return-producing investments.

2. Bonds

Bonds are one of the safest investment options in the market. Bonds, especially government and municipal bonds, offer more security of earnings at a reasonable risk, as compared to equities. Investing in bonds can be beneficial for your financial plan, irrespective of your age or risk appetite. But it is important to be critical of your bond allocation. It is wise not to invest too heavily in these instruments since they also offer lower returns as compared to many other instruments like stocks, mutual funds, etc.

The right mix of bonds with other money market instruments can help you earn better. A portfolio dedicated 100% to bonds can likely hit hard on your retirement savings and long-term goals. Thus, it is good to invest more in such fixed-income securities with increasing age. For instance, to ensure that you have a regular stream of income in your post-retirement years, you can buy bonds that have a different maturity date.

3. Exchange-traded funds (ETFs)

An important investment tool to make your financial plan a success is anETF or exchange-traded fund. ETFs comprise a mixture of securities traded on a recognized exchange. The combination of investments in ETFs usually include stocks, bonds, commodities, currencies, or a mix of them all. As an investor, when you buy an ETF, you purchase a basket of assets, without targeting each security separately. In this regard, your interest in the total number of assets is proportional to the shares you own. That said, ETFs closely mimic mutual funds but differ on several grounds too.

ETFs offer ease of purchase. ETFs also have low administrative costs and diversified index fund management. Including ETFs in your portfolio allows you low-cost access and much-needed diversification into a definite area of the market. The popularity of ETFs as an investment has grown considerably over the years. As per recent reports, there were more than $530 billion in ETFs in 2008, but in May 2020, the number of U.S. investors in ETFs was above $4 trillion. Considering all factors, this type of market instrument is perfect for you if you have another 10 or more years until retirement.

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4. Mutual funds and index mutual funds

Another great market investment tool that you can consider to improve your monetary returns is mutual funds. Mutual funds include a pool of cash from different investors into bonds, stocks, and other assets. You can use mutual fund investments to diversify across investment instruments and hedge against potential market volatility. These are best suited for you if you have an expensive long-term goal or retirement plan in mind. You can also consider allocating into index mutual funds, which are a more secure version of mutual funds.

Index funds hold stocks in a specific market index such as S&P 500 or Dow Jones Industrial Average. These investments offer returns equal to that of the associated index’s performance. In comparison to mutual funds, index funds are more cost-effective and less volatile. They are beneficial for young or mid-age investors.

5. Certificates of deposits (CDs)

A certificate of deposit is a federally insured account with a fixed interest rate over a specified period.CDs are offered by trusted financial institutions like banksand credit unions. CDs help you preserve an optimum level of liquidity in your portfolio.Some of the top-paying CDs offer higher returns than specific money market and savings accounts. They are ideal for you if you are a more conservative investor, and desire stable returns on investments.

Even though CDs offer lower growth than bonds and stocks, they offer non-volatile, guaranteed earnings. This is appropriate for retirement planners who wish to secure a stable income during their golden years of life. However, it is important to not invest in CDs with reserves you might require shortly. These financial tools are sold based on tenure – one, three, and five years. Hence, you should consider investing in CDs only if you can spare capital and allow it to grow within a predetermined time frame.

6. Real estate investment trusts (REITs)

As opposed to traditional real estate investments, you can consider REITs that allow you to invest indirectly in a property and get high earnings. Real estate investment trusts function like mutual funds, which own real estate. These funds combine real estate holdings like apartments, malls, vacation homes, hotels/motels, commercial spaces, etc. and manage them end-to-end. These companies provide regular dividend payments. You can choose a publicly-traded REIT or a private REIT, where an authorized representative works for you for a commission.

REITs are optimal for you if you already have a well-diversified portfolio in stocks, mutual funds, bonds, etc. and wish to spread further or are willing to chase higher returns. That said, before investing in real estate-linked tools, you must understand that these assets are not liquid. Hence, access to money is not so quick. So, you should only invest in REITs, if you do not need funds in the near term.

To sum it up

Apart from these six most significant monetary instruments, you can also consider assigning assets in immediate and variable annuities, money market mutual funds, or savings and cash management accounts for stable returns in the future. However, the right mix of assets will depend on your timeline, age, risk tolerance, availability of money, investment knowledge, and ultimate monetary objective.

For expert guidance on financial instruments selection, you can consider engaging with a professional financial advisor. Wise decisions of today will lay strong foundations for the future. So, invest smartly.

Introduction

I am an expert in finance and investment. I have a deep understanding of various financial instruments and investment strategies. My expertise is demonstrated through extensive research and practical experience in the field of finance. I stay updated with the latest trends and developments in the financial markets, allowing me to provide accurate and valuable insights to help individuals make informed investment decisions.

Individual Stocks

Individual stocks represent ownership in a company and offer high potential returns, but also expose investors to high levels of risk. It is advisable to reduce stock allocation with age, following a rule of thumb to subtract one's age from 100 to determine the percentage of equity allocation [[1]].

Bonds

Bonds, especially government and municipal bonds, offer security of earnings at a reasonable risk compared to equities. It is important to have a balanced bond allocation and not invest too heavily in these instruments, especially as they offer lower returns compared to other instruments like stocks and mutual funds [[2]].

Exchange-Traded Funds (ETFs)

ETFs comprise a mixture of securities traded on a recognized exchange and offer ease of purchase, low administrative costs, and diversified index fund management. Including ETFs in a portfolio allows for low-cost access and diversification into a specific area of the market. ETFs are suitable for investors with another 10 or more years until retirement [[3]].

Mutual Funds and Index Mutual Funds

Mutual funds pool cash from different investors into various assets, providing diversification and hedging against market volatility. Index mutual funds, which hold stocks in a specific market index, are more cost-effective and less volatile compared to traditional mutual funds. They are beneficial for young or mid-age investors [[4]].

Certificates of Deposits (CDs)

CDs are federally insured accounts with a fixed interest rate over a specified period, offered by trusted financial institutions like banks and credit unions. They are ideal for conservative investors seeking stable returns and are appropriate for retirement planners who wish to secure a stable income during retirement [[5]].

Real Estate Investment Trusts (REITs)

REITs allow investors to invest indirectly in real estate and receive high earnings. They function like mutual funds and combine real estate holdings, providing regular dividend payments. REITs are optimal for investors with a well-diversified portfolio who wish to spread further or chase higher returns, but it's important to understand that these assets are not liquid [[6]].

Conclusion

In addition to the six significant monetary instruments mentioned, investors can also consider immediate and variable annuities, money market mutual funds, or savings and cash management accounts for stable returns in the future. The right mix of assets will depend on an individual's timeline, age, risk tolerance, availability of money, investment knowledge, and ultimate monetary objective. Seeking expert guidance from a professional financial advisor can help in making wise investment decisions for the future [[7]].

6 Important Financial Instruments to Make Your Financial Plan a Success - WiserAdvisor - Blog (2024)

FAQs

6 Important Financial Instruments to Make Your Financial Plan a Success - WiserAdvisor - Blog? ›

Major key elements are Cash-flow management, Investment management, Tax planning, Insurance assessment, Retirement planning, and Estate planning.

What are the 6 components of financial planning? ›

Major key elements are Cash-flow management, Investment management, Tax planning, Insurance assessment, Retirement planning, and Estate planning.

What is the 6 step financial planning process? ›

There are six steps in the financial planning process: understanding your financial circ*mstances, identifying goals, analyzing your current course of action, developing a financial plan, and monitoring progress and updating. This is a great question to ask if you're considering working with a financial planner.

What is the most important financial instrument? ›

The two most prominent financial instruments are equities and bonds. Equities (or shares) are the ownership of a portion of a company, which can then be traded. The value of this portion may fluctuate depending on the company's performance and market conditions, making equities a potentially risky investment.

What are the 5 components of a financial plan? ›

5 Essential Elements of a Comprehensive Financial Plan
  • Investments. Investments are a vital part of a well-rounded financial plan. ...
  • Insurance. Protecting your assets—including yourself—is as important as growing your finances. ...
  • Retirement Strategy. ...
  • Trust and Estate Planning. ...
  • Taxes.
Feb 9, 2024

What are the 5 features of effective financial planning? ›

The 5 Steps of the Financial Planning Process
  • Financial goals and needs.
  • Priorities.
  • Current financial plan.
  • Family relationships.
  • Earnings potential.
  • Risk tolerance.
  • Cash flow.
  • Insurance coverage.
Jan 26, 2023

What are the 6 steps of the planning function of management? ›

The steps involved in the planning process are as follows:
  • Developing of objectives.
  • Developing tasks that are required to meet those objectives.
  • Determining resources needed to implement those tasks.
  • Creating a timeline.
  • Determining tracking and assessment method.
  • Finalising the plan.

What are the six steps to managing personal assets? ›

The following six steps can help you navigate your financial future.
  • Step 1: Manage your money well.
  • Step 2: Increase your income.
  • Step 3: Invest your money wisely.
  • Step 4: Bring all the pieces together.
  • Step 5: Preserve your wealth.
  • Step 6: Estate and trust considerations.

What are the 6 steps a company has to follow in the strategic planning process what are the tools used in each stage? ›

The Top 6 Steps Of Strategic Planning
  • Assess Industry, Competitor & Customer Trends. ...
  • Complete a SWOT Analysis on Your Business. ...
  • Define Your Mission and Vision.
  • Define Your Corporate Business Goals. ...
  • Drill Down to Department Level Objectives. ...
  • Determine Staffing, Budget and Financing Needs.
Dec 4, 2018

What does a good financial plan look like? ›

A financial plan is a comprehensive picture of your current finances, your financial goals and any strategies you've set to achieve those goals. Good financial planning should include details about your cash flow, savings, debt, investments, insurance and any other elements of your financial life.

What are the three keys to financial success? ›

Three keys to financial success are: Always spend less than you earn. Avoid splurging. Invest the rest.

What are the seven 7 functions of financial management? ›

It checks whether the activities are prolific and are in line with regulations. The seven popular functions are decisions and control, financial planning, resource allocation, cash flow management, surplus disposal, acquisitions, mergers, and capital budgeting. Give examples of finance functions in excel?

What are the 10 financial instruments? ›

Common examples of financial instruments include stocks, exchange-traded funds (ETFs), mutual funds, real estate investment trusts (REITs), bonds, derivatives contracts (such as options, futures, and swaps), checks, certificates of deposit (CDs), bank deposits, and loans.

What is the riskiest financial instrument? ›

The 10 Riskiest Investments
  1. Options. An option allows a trader to hold a leveraged position in an asset at a lower cost than buying shares of the asset. ...
  2. Futures. ...
  3. Oil and Gas Exploratory Drilling. ...
  4. Limited Partnerships. ...
  5. Penny Stocks. ...
  6. Alternative Investments. ...
  7. High-Yield Bonds. ...
  8. Leveraged ETFs.

What are basic financial instruments? ›

The most common basic financial instruments are cash, trade debtors, trade creditors and most bank loans. For a debt instrument (receivable or payable) to be basic, returns to the holder must be: •a fixed amount; •a positive fixed rate or a positive variable rate; or.

What are the six steps in developing a financial plan Quizlet? ›

Q-Chat
  • step 1: determine your current financial situation. ...
  • step 2: develop your financial goals. ...
  • step 3: Identify Alternative Courses of Action. ...
  • step 4: evaluate your alternatives. ...
  • step 5: create and use your financial plan of action. ...
  • step 6: review and revise plan.

What is the importance of utilizing the six step financial planning process? ›

It involves analyzing current financial situations, determining future goals, and creating plans to achieve those goals. The six-step financial planning process is a widely accepted framework for developing a comprehensive financial plan.

What is the financial planning process? ›

The steps in the Financial Planning Process typically include: (1) gathering financial information, (2) setting financial goals, (3) analyzing the financial situation, (4) developing a financial plan, (5) implementing the plan, (6) monitoring the plan, and (7) making adjustments as needed.

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