Creating an Investment Plan
Lay out a course of action before you invest.
Our two cents
Creating an investing plan may sound complex, but it can actually be very simple. It starts with your goals and your tolerance for risk.
Set your goals
If you haven't done it yet, set your goals. Write down both your short-term and long-term goals. And make sure they're realistic and actionable.
Waiting to save and invest can be hazardous to your wealth. The sooner you get started, the sooner your money can get to work. And the longer you wait, the more difficult it will be to reach your goals.
Consider how time affects risk
Time in the market is key when you invest. The longer you have to reach your goal, the more risk you can generally afford to take because your investments have more time to benefit from up markets and recover from down ones. This is why being more aggressive and taking more risk makes sense the further you are from your goal. As your goals get closer, it's typically a good idea to shift your investments to more stable (or conservative) investments to protect against losses.
A general guideline
If you'll need your money in:
- Less than three years—You probably shouldn't be investing in stocks. They're just too volatile. Consider cash investments like money market funds or CDs and maybe short-term bonds or bond funds instead.
- Three to five years—It may be appropriate to invest some of your money in stocks (depending on your risk tolerance), but the bulk should be in bonds or cash equivalents since you don't have much time to recover from stock market losses.
- Six to 10 years or longer—You can add more stocks to the mix and it's quite reasonable to invest most of the money (more than half) given how much time you have to invest.
Think about risk
When investing, some people tend to focus on how much they can make and not think about how much they can afford to lose—their risk capacity. The reality of investing is that markets go up—and they also go down. Virtually any investment involves some level of risk, so it's very important that new investors understand how they feel about risk. This will help you decide if you want to invest conservatively, moderately or aggressively. The investor profile questionnaire can help you figure out your own risk tolerance.
Deciding how much risk you're willing to take is one of the first and most important steps. As the following chart shows, investments that have the greatest potential for return also carry the greatest risk.
Higher returns have come with increased short-term volatility
Indices underlying model asset allocation plans (1970-2021*)
Source: Schwab Center for Financial Research with data provided by Morningstar, Inc. The return figures represented are the average, minimum, and maximum annual total returns of indices used to represent an asset class in Schwab’s hypothetical asset allocation plans. Returns include reinvestment of dividends and interest. The indices representing each asset class are S&P 500® Index (large-cap equity), Russell 2000® Index (small-cap equity), MSCI EAFE® Index-Net of Taxes (international equity), Bloomberg Barclays US Aggregate Bond Index (fixed income), and FTSE U.S. 3-month Treasury Bill Index (cash equivalents). CRSP 6-8 Index was used for small-cap stocks prior to 1979, Ibbotson Intermediate-Term Government Bond Index was used for fixed income prior to 1976, and Ibbotson U.S. 30-day Treasury Bill Index was used for cash investments prior to 1978. Indices are unmanaged, do not incur fees or expenses, and cannot be invested in directly. For additional information, please see Schwab.com/Index Definitions. Past performance is no guarantee of future results. *YTD as of 6/30/2021
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Don't put all your eggs in one basket
By mixing different kinds of investments that don't go up and down at the same time, you'll reduce the amount of risk you are taking. This is the idea behind diversifying your investments. Diversifying broadly means you have exposure to different kinds of investments and different sectors of the market. By not chasing performance or trying to "time the market," you'll decrease the odds of making mistakes.
Minimize fees and taxes
While you can't know or control the markets, you can estimate costs and taxes in advance. Take steps to minimize both. With investing, it's not just how much you make, but how much you keep. You don't always get more by paying higher fees (in fact, the odds are against it) and who likes to pay more in taxes? Use low cost investments and take advantage of tax-smart strategies like retirement accounts. Once you have a plan in place, you should monitor your investments and rebalance your portfolio regularly.
The Schwab Center for Financial Research is a division of Charles Schwab & Company, Inc.
This is for informational purposes only and is not a solicitation or a recommendation that any particular investor should purchase or sell any particular security.
Investing involves risk, including possible loss of principal.