Making an Investment Plan: A Step-by-Step Guide - SmartAsset (2024)

Making an Investment Plan: A Step-by-Step Guide - SmartAsset (1)

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 are 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

Making an Investment Plan: A Step-by-Step Guide - SmartAsset (2)

The next step in crafting your investment plan is to decide how much risk you are 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

Making an Investment Plan: A Step-by-Step Guide - SmartAsset (3)

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

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 growthyou’ll experience over time.

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As an experienced financial advisor with a deep understanding of investment planning, I can provide valuable insights into the concepts mentioned in the article you provided. Let's delve into each step and discuss the related concepts:

  1. Assess Your Current Financial Situation:

    • Budgeting: This involves analyzing your income and expenses to determine your disposable income available for investment.
    • Emergency Savings: Setting aside funds for unexpected expenses ensures financial stability and liquidity.
    • Asset Liquidity: Understanding the liquidity of different investment options, such as stocks versus real estate, is crucial for meeting short-term financial needs.
  2. Define Financial Goals:

    • Goal Setting: Clearly defining objectives for investing, whether it's purchasing a car, funding education, or planning for retirement.
    • Goal Timeline: Determining the time horizon for achieving each financial goal, which influences investment strategies and risk tolerance.
    • Categories of Goals: Segregating goals into categories like safety, income, and growth helps tailor investment approaches to specific objectives.
  3. Determine Risk Tolerance and Time Horizon:

    • Risk Assessment: Evaluating your willingness and capacity to withstand investment losses, considering factors such as age, financial obligations, and investment goals.
    • Time Horizon: Identifying the duration until funds are needed for achieving financial objectives, particularly relevant for retirement planning.
  4. Decide What to Invest In:

    • Asset Allocation: Allocating investments across different asset classes (e.g., stocks, bonds, real estate) based on risk tolerance and investment goals.
    • Diversification: Spreading investments across various asset types to mitigate risk and optimize returns.
    • Investment Vehicles: Exploring options such as stocks, bonds, mutual funds, retirement accounts (e.g., 401(k), IRA), savings accounts, and alternative investments like real estate or art.
  5. Monitor and Rebalance Your Investments:

    • Portfolio Review: Regularly assessing investment performance and adjusting asset allocation to maintain alignment with financial objectives and risk tolerance.
    • Rebalancing: Restoring the desired asset allocation by buying or selling assets, especially after significant market movements or changes in personal circumstances.

In addition to these steps, the article highlights the importance of seeking assistance from financial advisors, starting investments early to leverage compounding returns, and utilizing resources like SmartAsset's tools to facilitate decision-making.

By incorporating these fundamental principles into your investment plan, you can navigate the complexities of financial markets with confidence and work towards achieving your long-term financial goals.

Making an Investment Plan: A Step-by-Step Guide - SmartAsset (2024)
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