The sum total of your investments managed toward a specific goal.
Imagine you want to visit a friend, but you don't know where she lives. Would you get in your car and start driving, hoping you'll eventually find her? No—you'd get her address and map your route there.
Think of your investment plan as a map to get you to your financial goal. It will help you set your destination and the route that will get you there. And like plotting out a road trip, investment planning doesn't have to be complicated, doesn't require the services of a professional, and doesn't need to take a long time.
Road trips are a great vacation for some people, but they're not much fun for others. If you're not the kind of person who wants to put the time and energy into choosing investments and managing a portfolio, that's fine.
We still recommend that you have a basic understanding of how investing works. It's your money, after all. But an advisor can be your driver—or come along for the ride, if you just want someone to bounce ideas off of.
Usually refers to investment risk, which is a measure of how likely it is that you could lose money in an investment. However, there are other types of risk when it comes to investing.
Creating your investment plan starts with answering these questions:
It's a good idea to document your answers so that you have a touchstone for making future decisions about your portfolio.
Deciding how much money you want to have and when you need it is probably pretty easy. Knowing how comfortable you are with risk might be a lot tougher if you've never thought about it or experienced it yourself.
But don't just wing it. Your risk tolerance is one of the critical ingredients in deciding what you're going to invest in. Picking investments that are riskier than you can handle can lead to some pretty ugly outcomes.
But choosing investments that aren't risky enough—that don't have the right potential for growth—can also be a roadblock in reaching your goal.
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 have a greater ability to take risk—kind of like choosing a route you're not as familiar with.
On the other hand, if you're starting your journey a little late, you have less room for unexpected detours. In that case, you'd be better off taking a "safer" route.
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.
When earnings on invested money generate their own earnings. For example, if you invested $5,000 and earned 6% a year, in the first year you'd earn $300 ($5,000 x 0.06), in the second year you'd earn $318 ($5,300 x 0.06), in the third year you'd earn $337.08 ($5,618 x 0.06), and so on. Over longer periods of time, compounding becomes very powerful. In this example, you'd earn over $1,600 in the 30th year.
Allowing yourself plenty of time to get to a destination is always a good strategy. When it comes to investing, the more time you have, the more you can benefit from compounding.
All investing is subject to risk, including the possible loss of the money you invest.
Vanguard's advice services are provided by Vanguard Advisers, Inc. ("VAI"), a registered investment advisor, or by Vanguard National Trust Company ("VNTC"), a federally chartered, limited-purpose trust company.
The services provided to clients will vary based upon the service selected, including management, fees, eligibility, and access to an advisor. Find VAI's Form CRS and each program's advisory brochure here for an overview.
VAI and VNTC are subsidiaries of The Vanguard Group, Inc., and affiliates of Vanguard Marketing Corporation. Neither VAI, VNTC, nor its affiliates guarantee profits or protection from losses.
