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

Making an investment plan involves more than just choosing a few stocks. You must also consider your current financial situation, as well as your goals for the future. It’s also important to define your timeline and determine how much risk you are willing to assume in order to determine your optimal asset allocation. These considerations help to mitigate any risk you might encounter in the stock market. That is why it is extremely important to do your planning before you invest your hard-earned money. This guide can help lead the way.

You can consult a financial advisor to explore the right investment opportunities for 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 current financial situation. Create 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 is also important to consider how accessible, or liquid, you need your investments to be. If you might need to cash in your investment quickly, investing in more liquid assets, like stocks, may be preferable over 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 want to maintain your current level of wealth.
• Income is when you want investments to provide active income to live off of. 
• Growth is when you want to build wealth over the long term. 

You can determine the best investment path for you based on where your goals fall.

Step #3: Determine Risk Tolerance and Time Horizon

The next step in making 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 low-risk 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 several years, you may want to choose a safer investment path.

Determining your time horizon is fairly simple compared to its risk counterpart. This is when you will want to begin pulling from your investments to achieve your ultimate financial goal. For the vast majority of Americans, time horizon is basically synonymous with retirement.

By determining your risk tolerance and time horizon, you can build a reliable asset allocation for yourself. Simply take your investor profile, determine what you should invest in and then decide the percentage each investment will comprise of your overall portfolio. 

SmartAsset’s asset allocation calculator can help you get started.

Step #4: Decide What to Invest In

The final step is to decide where to invest. There are many different types of 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. 

Common investments for your portfolio include the following types of investments. 

• Securities like stocks, bonds and mutual funds
• Long-term options like 401(k) plans and IRAs
• Bank savings accounts or CDs
• 529 plans for education savings

You can even invest in real estate, art and other physical items.

Wherever you decide to invest, make sure to diversify your portfolio. You do not want to put all of your money into stocks and risk losing everything if the stock market crashes, for example. Instead, it is best to allocate your assets to a few different investment types that fit your goals and risk tolerance in order to maximize both 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: Create an Investment Policy Statement (IPS)

An Investment Policy Statement is a written plan that outlines your goals, risk tolerance, asset allocation targets and investment rules. This document helps guide your investment decisions and serves as a reference point when emotions run high during market swings.

Including an IPS can help keep your strategy consistent over time. It helps formalize your decisions, so you are less likely to deviate from your plan during periods of volatility. This step adds structure to your approach and bridges the gap between choosing investments and monitoring them.

Step #6: Monitor and Rebalance Your Investments

Once you have made your investments, you should check in periodically to see how they are performing. You can then decide if you need to rebalance.

For example, maybe you aren’t putting enough money into your investments each month so you aren’t on track to reach your goals, or maybe you’re depositing more than what is required and you’re ahead of schedule. Perhaps, 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 achieve your goals sooner.

Once you feel like your investment plan is in good shape, you’ll want to consider rebalancing your portfolio. This brings 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, or ETFs.

Bottom Line

Becoming a good investor requires research and experience. If you are a beginner to investing, do not worry –experience will come in time. In the meantime, analyze the different types of investments that are available to you so you can familiarize yourself with their performance and assess their suitability for your portfolio. Once you are ready to move forward, open an account with one of the best brokerages so you can begin investing.

Work with a financial advisor who can assess your financial goals and recommend the right asset allocation for your portfolio.

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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