Building a solid investment plan can help you reach your financial goals and weather the normal ups and downs of the market. It starts with establishing your short- and long-term goals, and understanding how much risk you are comfortable taking.

1. Defining Your Present Situation

The first step in creating an investment plan is evaluating your financial situation to determine how much money you have to invest. This can be done by making a budget and evaluating your monthly disposable income after expenses and emergency savings. This will help you determine how much of your portfolio should be invested in stocks, bonds, or cash investments, such as money markets or high-yield savings accounts.

2. Determining Your Tolerance for Risk

All investments involve risk, but your own personal factors—like age, health, and your appetite for volatility—help you determine how much risk you can comfortably take. Knowing your tolerance for risk allows you to choose a more aggressive strategy, like investing in stocks, or a more conservative one, such as investing in bonds.

3. Establishing Your Time Horizon

The next step is identifying how soon you will need to use the money you have invested, which helps you decide what type of investments to purchase. If you have less than three years to invest, it is likely that a significant portion of your portfolio should be invested in low-risk investments such as money market funds or CDs.

If you have three to 10 years, you can consider more-risky investments like individual stocks and mutual funds. It is also a good idea to diversify your stock holdings by market capitalization (small, mid, and large caps), sector, and geography, as well as bond investments by credit quality, duration, and maturity to reduce overall portfolio risk.