The second category of your investment plan is investment guidelines and constraints.

Investment guidelines: Your investment guidelines are the road map for how you will invest over your lifetime. These guidelines and constraints explain the ways in which you will invest differently at different phases in your life. Young investors are typically concerned with accumulating and increasing wealth. As investors age, they become more concerned with preserving their investments and wealth. As investors retire, they become more concerned with having investments that can be used as a source of income, so income-producing assets become more important to them. The determination of which of these goals is important to you will depend on where you are in your financial life cycle. Generally, most individuals have three stages of their financial life cycle. Most investors who are younger than age fifty-five are in stage one, or capital accumulation and growth. Investors who are approaching retirement are typically in stage two, where the main goal is investment preservation, or maintaining the value of investments. Investors who have retired are typically in stage three, where their main concern is income generation, or utilizing the assets that have been saved to provide income during retirement.

Your investment guidelines should provide you with a general road map for investing money at different stages of your financial life cycle. These guidelines should integrate all of your financial goals to give you a complete financial perspective.

Investment constraints: Once you have decided on your investment guidelines, you should identify your investment constraints. Investment constraints are constraining factors that you must take into account as you manage your portfolio. Your investment plan should address a number of important constraints: liquidity, investment horizon, tax considerations, and any special needs.

Liquidity is the speed and ease with which an asset can be converted into cash. As you create your plan, consider how important it is for you to have the option of turning your assets into cash quickly. Ask yourself how much money you will need at different times in your life and how quickly that money needs to be available. Examples of liquidity constraints include paying for graduate school, making a down payment on a house, and sending a child to college or on a mission. To pay for these expenses, you will need to convert assets into cash.

Your investment horizon is the amount of time you are planning to keep an asset to save for a particular purchase. Consider how soon you will need to use the funds from a particular investment. Examples of short-term investment horizons include saving for a new car or making a down payment on a house. An example of a long-term investment horizon would be saving for retirement or saving for your children’s college educations or missions.

Tax considerations take into account your current tax bracket and your current tax rates. Consider your tax position: are tax-free or tax-deferred investments more advantageous to have than taxable investments? You cannot simply compare the stated returns of particular assets; you must compare assets by taking into account that certain investments eliminate federal or state taxes and that other investments are tax-free. For example, if you are comparing government I and EE savings bonds versus corporate bonds, you must take into account that government I and EE savings bonds are state tax-free (and federal tax-free if principal and interest are used for college tuition costs), while corporate bonds have no tax advantages.

Special needs constraints relate specifically to your family, your business, and other areas of life that are important to you. Do you have a child with a disability? This may impose specific requirements on your investment plan because you will likely need life insurance to provide funds for a disabled child in case of your death. Is a large part of your wealth tied up in your company? This imposes constraints such as the decision of how much you should invest in your company’s employee stock-ownership plans. You may have other special constraints that will influence your investment decisions. It is critical that you understand your special needs before you begin investing.