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Making an Investment Plan: A Step-by-Step Guide

Byline profile imageWritten by Danielle Klimashousky
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Byline profile imageEdited by Marie White, CEPF®
Updated on
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Making an investment plan involves more than just choosing a few stocks to put money in. You have to consider your current financial situation and your goals for the future. It’s also important to define your timeline and how much risk you’re willing to take on in order to determine your optimal asset allocation. All of these steps help to mitigate any risk you might encounter in the stock market. In turn, planning before you invest your hard-earned money is extremely wise. This may require a lot of research or consulting with a financial advisor to help talk you through your unique financial situation.

Step #1: Assess Your Current Financial Situation

The first step in making an investment plan for the future is to define your present financial situation. You need to figure out how much money you have to invest. You can do this by making a budget to evaluate your monthly disposable income after expenses and emergency savings. This will allow you to determine how much you can reasonably afford to invest.

It’s also important to consider how accessible, or liquid, you need your investments to be. If you might need to cash in on your investment quickly, you would want to invest in more liquid assets, like stocks, rather than in something like real estate.

Step #2: Define Financial Goals

The next step in making an investment plan is to define your financial goals. Why are you investing? What are you hoping to earn money for? This can be anything from buying a car in a few years to retiring comfortably many years down the road.

You must also define your goal timeline, or time horizon. How quickly do you want to make money from your investments? Do you want to see quick growth, or are you interested in seeing investment growth over time?

All of your goals can be summed up in three main categories: safety, income and growth. Safety is when you’re looking to maintain your current level of wealth, income is when you want investments to provide active income to live off of and growth is when you want to build wealth over the long term. You can determine the best investment path for you based on which of these three categories your goals fall into.

Step #3: Determine Risk Tolerance and Time Horizon

Part of making an investment plan involves balancing risk versus reward.

The next step in crafting your investment plan is to decide how much risk you’re willing to take. Generally speaking, the younger you are, the more risk you can take, since your portfolio has time to recover from any losses. If you are older, you should seek less risky investments and instead invest more money upfront to spur growth.

Additionally, riskier investments have the potential for significant returns – but also major losses. Taking a chance on an undervalued stock or piece of land could prove fruitful, or you could lose your investment. If you are looking to build wealth over years, you may want to choose a safer investment path.

Determining your time horizon is fairly simple compared to its risk counterpart. The term essentially means about when do you want to begin pulling from your investments for your ultimate financial goal. For the vast majority of Americans, time horizon is basically synonymous with retirement.

By figuring out your risk tolerance and time horizon, you can build a reliable asset allocation for yourself. This entails taking your investor profile, figuring out what you should invest in and what percentage of your overall portfolio each investment type should take up. Try using SmartAsset’s asset allocation calculator to get started.

Step #4: Decide What to Invest In

The final step is to decide where to invest. There are many different accounts you can use for your investments. Your budget, goals and risk tolerance will help guide you towards the right types of investment for you. Consider securities like stocks, bonds and mutual funds, long-term options like 401(k) plans and IRAs, bank savings accounts or CDs, and 529 plans for education savings. You can even invest in real estate, art and other physical items.

Wherever you device to invest, make sure to diversify your portfolio. You don’t want to put all of your money into stocks and risk losing everything if the stock market crashes, for example. It’s best to allocate your assets to a few different investment types that fit in with your goals and risk tolerance in order to maximize your growth and stability.

Once you reach this step in the process, it may be appropriate to find a financial advisor. An advisor can help you determine the best ways to invest your money based on your current financial situation and goals.

Step #5: Monitor and Rebalance Your Investments

Once you have made your investments, it’s not wise to just leave them alone. Every so often, you should check in to see how your investments are performing and decide if you need to rebalance.

For example, maybe you aren’t putting enough money into your investments monthly and you aren’t on track to reach your goals, or maybe you’re depositing more than you need to and you’re ahead of schedule. Maybe you want to move your money to a more stable investment as you get closer to achieving your long-term goals, or maybe your investments are performing well and you want to take on even more risk to reach your goals sooner.

Once you feel like your investment plan is in good shape, you’ll want to consider rebalancing your portfolio. This involves bringing your portfolio’s composition back to its intended asset allocation. For instance, let’s say your stock investments performed much better than the rest of your portfolio. In order to keep your proper asset allocation in place, it may make sense to sell some of your stocks and redistribute that money to other investment types. These could include bonds, CDs, ETFs and more.

Bottom Line

A man sits down to make an investment plan.

Just like anything else in the realm of personal finance, becoming a good investor requires research and experience. If it’s your first time investing, the experience will come, so focus on soaking up information about the different types of investments that are available to you. Once you’re ready to move forward with investing you get to then start your research on finding the best brokerage to work with.

Investing Tips for Beginners

  • If you’re new to the investment game, don’t hesitate to ask for help from a professional. Financial advisors typically specialize in investing and financial planning, making them great partners for newbies. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Start investing sooner rather than later. Once you have an emergency fund in place and your debts in check, start investing. The sooner you start, the more risk you can afford to take and the more investment growth you’ll experience over time.

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