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

Before deciding how much to invest, take stock of how much money comes in each month and where it goes. Reviewing your income, fixed expenses and discretionary spending can help you identify how much cash you may be able to invest consistently without straining your budget.

Consider whether you have enough cash set aside for emergencies and near-term expenses before committing additional money to investments. An emergency fund can help cover unexpected costs without forcing you to sell investments at an unfavorable time.

Make a list of your outstanding debts, including credit cards, student loans, auto loans and mortgages, along with their interest rates and monthly payments. Paying down high-interest debt may take priority over investing because the interest you save can outweigh the potential returns from taking additional investment risk.

Your net worth is the value of what you own minus what you owe. Adding up assets such as cash, retirement accounts and property, then subtracting liabilities, can give you a clearer picture of your overall financial position and provide a baseline for measuring future progress.

A sustainable investment plan should fit comfortably within your regular cash flow. Knowing how much you can invest each month can help you set realistic contribution targets and avoid having to interrupt your investment strategy when other expenses arise.

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

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

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.

Tips for Creating the Right Investment Plan

A good investment plan should reflect your goals, time horizon, financial situation and comfort with risk. Taking the time to define those factors can help you build a strategy that is easier to follow and adjust as your circumstances change.

Set specific financial goals: Identify what you are investing for, such as retirement, a home purchase or education expenses, and estimate how much money you may need.
Match investments to your time horizon: Money needed within a few years may call for a more conservative approach, while longer-term goals may allow you to take on more market risk.
Know your risk tolerance. Consider how much volatility you can realistically handle without abandoning your strategy during a market downturn.
Diversify your portfolio. Spreading money across different asset classes, industries and investments can help reduce the impact of poor performance in any single area.
Keep fees and taxes in mind. Investment expenses and taxes can reduce returns over time, so compare account types, fund costs and potential tax consequences when building your plan.
Invest consistently. Making regular contributions can help you stay disciplined and avoid trying to predict short-term market movements.
Review your plan periodically. Revisit your investments after major life changes or at regular intervals to make sure your asset allocation and contribution levels still align with your goals.
Consider professional guidance. A financial advisor can help you evaluate your goals, risk tolerance and investment options while creating a plan that fits into your broader financial strategy.

Bottom Line

A man sits down to make an investment plan.

Creating an investment plan starts with understanding your current finances and defining what you want your money to accomplish. From there, you can choose investments based on your goals, time horizon and risk tolerance while accounting for diversification, fees and taxes. Reviewing the plan regularly and adjusting it as your circumstances change can help keep your investment strategy aligned with your long-term financial goals.

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 financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel 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.