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Investing strategies

How to use investment planning to reach your financial goals

12 minute read

It might sound like a lot of work, but investment planning doesn't have to be complicated. It just involves figuring out the answers to a few key questions.

What is investment planning?

Investment planning is the process of determining your financial goals and aligning your financial resources to meet them. But what does that mean for you? In this article, we'll offer some specific questions you can ask yourself to get started on your investment planning journey.

Benefits of investment planning

Investment planning is an important process because it can help you get the maximum value from your hard-earned savings. A well-structured investment plan can help:

  • Generate income.
  • Reduce tax liability.
  • Give you financial freedom.
  • Provide financial security for you and your family.

Investment planning is personal

No 2 investment planning journeys will look the same. There's no one-size-fits-all approach that will work for everyone because each financial situation is unique. The following questions can help you find the path that's right for you. And by answering them honestly, you can begin to build an investment plan that will help you reach your goals.

What's my current financial situation?

Do you know how much you're spending every month and how much you're saving? Investment planning starts with taking inventory of the money that's going into and out of your bank account on a regular basis as well as any additional assets you own.

Figuring out how much money you have left over each month can help you determine how much you can add to your investment plan through ongoing savings.

What are my financial goals?

Once you've assessed your financial situation, it's time to define your investing goals. For most investors, saving for retirement is a primary goal. Other common goals include saving for education or buying a house, but your financial goals can include anything that's important to you. Clearly mapping out your goals can help you decide how much you'd like to put toward each of them and the length of time you'll need to continue investing. The right combination can help you achieve the future lifestyle you want.

Not sure which of our advice services is right for you? Try our helpful guide.

What's my time horizon

Thoughtful investment planning evaluates goals based on the amount of time available to achieve them. Are you planning for retirement? If you still have many working years ahead of you, retirement is a long-term goal. If you're saving a down payment so you can own a home in the next 5 years, that's a short-term goal.

For long-term goals, you may think about taking on more investment risk if you wish, because you have time to recover from market volatility. On the other hand, when saving to buy a house, you have less time until you'll need the money, so you may want to consider a more conservative approach.

What's my risk tolerance?

Your risk tolerance is the amount of market volatility and potential loss you're willing to accept as an investor. Your risk tolerance can and probably will vary depending on your goal. If you have more time (or if your timeline isn't fixed), you can generally afford to take more risk. On the other hand, if you're not comfortable with unexpected volatility, you may be better served taking a lower-risk approach to investing. As you can see, your risk tolerance, time horizon, and ultimate goal all need to work together when you're deciding what to invest in.

How do I choose an investment account?

There are many different accounts and investment products you can consider for your investment planning. Be sure to include your goals, time horizon, and risk tolerance in the decision-making. However, feel free to explore all your options. There's a lot to choose from and your choice will depend on your situation. For example:

  • A standard brokerage account is an option for any individual who has some extra income to use toward an investment portfolio. These accounts provide access to a broad range of investments such as stocks, mutual funds, bonds, and ETFs (exchange-traded funds). You just have to be 18 and have a Social Security number to open an account. There are no limits to how much you're allowed to save, and you can withdraw your money anytime. However, you might owe taxes when selling investments that have increased in value.
  • An individual retirement account (IRA) is a tax-advantaged account designed to help individuals save for retirement. Money you place in this account can be tax-deferred, or earnings can be tax-free, depending on the type of IRA you have. Whether you're 18 and starting your first job or you've been working for decades, it's never too early or too late to open an IRA.
  • A 529 savings plan helps you save for a child's education. Much like an IRA, its specific saving focus helps you contribute, build up your balance, and use those savings at a tax advantage, as long as they're put toward qualified educational expenses. Relative or not, anyone can contribute to a 529 savings plan on behalf of a beneficiary. And anyone can be named a beneficiary on a 529 account. It's a great way for new parents to plan ahead. If you're expecting a child or already have young children, it's a good idea to consider opening a 529 account.

How do I build my investment portfolio?

You have a lot to choose from when building your portfolio. One of the most important things to do is diversify your portfolio by choosing a variety of investments. The most common asset classes are:

  • Stocks
    Stocks represent ownership in a company. When you buy a stock, you're buying a piece of that company. Stocks are generally considered to be the most volatile asset class, but they also tend to have the highest potential returns over the long term.
  • Bonds
    Bonds are essentially loans you make to a company or government. When you buy a bond, you're lending money to the borrower for a set period of time, and in return, you earn interest payments. Bonds are generally less volatile than stocks, but they also offer lower potential returns.
  • Mutual funds
    These are baskets of securities that are managed by a professional investment manager. Mutual funds can invest in a variety of asset classes, including stocks, bonds, and money market instruments. Mutual funds can possibly offer a way to diversify your investments and reduce your risk.
  • ETFs
    ETFs are similar to mutual funds, but they trade on an exchange like stocks. ETFs can also invest in a variety of asset classes, and they can offer some advantages over mutual funds, such as lower fees and great liquidity.

It's generally good to choose a variety of investment types when building your portfolio. This is known as portfolio diversification. Diversification can help to reduce your risk and improve your chances of achieving your investment goals. Here are some tips on how to diversify your portfolio.

  • Consider investing in different asset classes such as stock, bonds, mutual funds, and ETFs. By investing in a variety of asset classes, you can possibly reduce your risk of potential losses if one class underperforms.
  • Consider investing in different sectors. Within each asset class, there are different sectors. For example, the stock market is divided into sectors such as real estate, technology, health care, and financials. By investing in different sectors, you can help further reduce your risk.
  • Consider investing in different geographical regions. You can also diversify your portfolio by investing in assets from different countries or regions throughout the world. This can help reduce risk if one country's economy underperforms.

All these options may seem overwhelming, but we're here to help. The Vanguard investor questionnaire can help you narrow down your choices and find the investment path that best fits your needs.

How often do I need to revisit my investment plan?

Once you've made your investments, you'll need to check in periodically to see how they're performing. As the markets shift, so can your portfolio's risk level, so it's important to monitor your risk level and rebalance your portfolio when needed. We suggest looking at it once a year to ensure you're staying on track and taking steps to get back on track when necessary.

You also can enroll in one of our advice services, which provide automatic rebalancing for you. This can give you some time back, and it's an easy way to ensure your risk level remains on track. And to make sure you're consistently making contributions to your account, learn more about automatic investing

Ready to begin your investment journey?

Now that you've answered the questions, it's time to begin investment planning! Just like any endeavor, the more experience you gain, the better you become. It takes time to become familiar and comfortable with investing. So begin your investing journey today.

Begin your investment journey today.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments. Investments in bonds are subject to interest rate, credit, and inflation risk. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.

For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Vanguard Marketing Corporation serves as distributor for some 529 plans.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Vanguard does not provide legal or tax advice. This information is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Vanguard cannot guarantee that this information is accurate, complete, or timely. Vanguard makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax positions taken in reliance on, such information. We recommend that you consult a tax or financial advisor about your individual situation.

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