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To set your goals, you’ll need to have an idea of what things or experiences you want to have in your life that require money. For example, what lifestyle do you want to have once you retire? Do you enjoy traveling, nice cars, or fine dining? Do you have only modest needs? Use this list to help you set your goals in the next step.  Making a list will also help if you are saving for your children’s future. For example, do you want to send your children to a private school or college? Do you want to buy them cars? Would you prefer  public schools and using the extra money for something else? Having a clear idea of what you value will help you establish goals for savings and investment. In order to structure an investment plan, you must first understand why you are investing. In other words, where would you like to be financially, and how much do you have to invest to get there? Your goals should be as specific as possible, so that you have the best idea of what you’ll need to do to achieve them.   Popular financial goals include buying a home, paying for your child’s college, amassing a “rainy day” emergency fund, and saving for retirement. Rather than having a general goal such as “own a home,” set a specific goal: “Save $63,000 for a down-payment on a $311,000 house.” (Most home loans require a down payment of between 20% and 25% of the purchase price in order to attract the most affordable interest rate.)   Most investment advisers recommend that you save at least ten times your peak salary for retirement. This will allow you to retire on about 40% of your peak pre-retirement annual income, using the 4% safe withdrawal rule. For example, if you retire at a salary of $80,000, you should strive for at least $800,000 saved by retirement, which will provide you with $32,000 annual income at retirement, then adjusted annually for inflation. Use a college cost calculator to determine how much you will need to save for your children’s college, how much parents are expected to contribute and the various types of financial aid your children may qualify for, based on your income and net worth. Remember that costs vary widely depending on the location and type of school (public, private, etc.). Also remember that college expenses include not only tuition, but also fees, room and board, transportation, books and supplies.   Remember to factor time into your goals. This is especially true for long-term projects such as retirement funds. For example: John begins saving at age 20 using an IRA (Individual Retirement Account) earning an 8% return. He saves $3,000 a year for the next ten years, then stops adding to the account but keeps the IRA invested in the market. By the time John is 65, he will have $642,000 built up.   Many websites have “savings calculators” that can show you how much an investment will grow over a given length of time at a specified interest rate. While they’re not a substitute for professional financial advice, these calculators can give you a good place to start.   Once you determine your goals, you can use the difference between where you are today and where you want to be to determine the rate of return needed to get there. Acting against your need for returns is the risk required to earn them. Your risk tolerance is a function of two variables: your ability to take risks and your willingness to do so.  There are several important questions you should ask yourself during this step, such as:   What stage of life are you in? In other words, are you near the low end or closer to the peak of your income-earning potential? Are you willing to accept more risk to earn greater returns? What are the time horizons of your investment goals? How much liquidity (i.e. resources that can easily be converted to cash) do you need for your shorter-term goals and to maintain a proper cash reserve? Don't invest in stocks until you have at least six to twelve months of living expenses in a savings account as an emergency fund in case you lose your job. If you have to liquidate stocks after holding them less than a year, you're merely speculating, not investing. If the risk profile of a potential investment does not conform to your tolerance level, it's not a suitable option. Discard it. Your asset allocation should vary based on your stage of life. For example, you might have a much higher percentage of your investment portfolio in stocks when you are younger. Also, if you have a stable, well-paying career, your job is like a bond: you can depend on it for steady, long-term income. This allows you to allocate more of your portfolio to stocks. Conversely, if you have a "stock-like" job with unpredictable income such as investment broker or stock trader, you should allocate less to stocks and more to the stability of bonds. While stocks allow your portfolio to grow faster, they also pose more risks. As you get older, you can transition into more stable investments, such as bonds. Spend as much time as you can reading about the stock market and the larger economy. Listen to the insights and predictions of experts to develop a sense of the state of the economy and what types of stocks are performing well. There are several classic investment books that will give you a good start:   The Intelligent Investor and Security Analysis by Benjamin Graham are excellent starter texts on investing.  The Interpretation of Financial Statements by Benjamin Graham and Spencer B. Meredith. This is a short and concise treatise on reading financial statements.  Expectations Investing, by Alfred Rappaport, Michael J. Mauboussin. This highly readable book provides a new perspective on security analysis and is a good complement to Graham's books.  Common Stocks and Uncommon Profits (and other writings) by Philip Fisher. Warren Buffett once said he was 85 percent Graham and 15 percent Fisher, and that is probably understating the influence of Fisher on shaping his investment style. "The Essays of Warren Buffett," a collection of Buffett's annual letters to shareholders. Buffett made his entire fortune investing, and has lots of very useful advice for people who'd like to follow in his footsteps. Buffett has provided these to read online free: www.berkshirehathaway.com/letters/letters.html.  The Theory of Investment Value, by John Burr Williams is one of the finest books on stock valuation.  One Up on Wall Street and Beating the Street, both by Peter Lynch, a highly successful money manager. These are easy to read, informative and entertaining.  Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay and Reminiscences of a Stock Operator by William Lefevre use real-life examples to illustrate the dangers of emotional overreaction and greed in the stock market. You can also enroll in basic or beginner investment courses offered online. Sometimes these are offered free by financial companies such as Morningstar and T.D. Ameritrade.  Several universities, including Stanford and MIT, offer online investment courses.  Community centers and adult education centers may also offer financial courses. These are often low-cost or free and can provide you with a solid overview of investment. Look online to see if there are any in your area. Practice by “paper trading.” Pretend to purchase and sell stocks, using the closing prices each day. You can literally do this on paper, or you can sign up for a free practice account online at places such as How the Market Works. Practicing will help you hone your strategy and knowledge without risking real money. Whether you are a professional or a novice, this step is difficult, because it is both art and science. It requires that you develop the ability to assemble a tremendous amount of financial data about market performance. You also must develop “a feel” for what these data do and do not signify.  This is why many investors buy the stock of products that they know and use.  Consider the products you own in your home. From what’s in the living room to what’s inside the refrigerator, you have first-hand knowledge of these products and can quickly and intuitively assess their performance compared with that of competitors. For such household products, try to envision economic conditions that might lead you to stop purchasing them, to upgrade, or to downgrade. If economic conditions are such that people are likely to buy a product you are very familiar with, this might be a good bet for an investment. While trying to develop general expectations about the market and the types of companies that might be successful given present or expected economic conditions, it's important to establish predictions in some specific areas including:  The direction of interest rates and inflation, and how these may affect any fixed-income or equity purchases.  When interest rates are low, more consumers and businesses have access to money. Consumers have more money to make purchases, so they usually buy more. This leads to higher company revenues, which allows companies to invest in expansion. Thus, lower interest rates lead to higher stock prices. In contrast, higher interest rates can decrease stock prices. High interest rates make it more difficult or expensive to borrow money. Consumers spend less, and companies have less money to invest. Growth may stall or decline.   The business cycle of an economy, along with a broad macroeconomic view.  Inflation is an overall rise in prices over a period of time. Moderate or “controlled” inflation is usually considered good for the economy and the stock market. Low interest rates combined with moderate inflation usually have a positive effect on the market. High interest rates and deflation usually cause the stock market to fall. Favorable conditions within specific sectors of an economy, along with a targeted microeconomic view.  Certain industries are usually considered to do well in periods of economic growth, such as automobiles, construction, and airlines. In strong economies, consumers are likely to feel confident about their futures, so they spend more money and make more purchases. These industries and companies are known as “cyclical.”   Other industries perform well in poor or falling economies. These industries and companies are usually not as affected by the economy. For example, utilities and insurance companies are usually less affected by consumer confidence, because people still have to pay for electricity and health insurance. These industries and companies are known as “defensive” or “counter-cyclical.”

Summary:
Make a list of things you want. Set your financial goals. Determine your risk tolerance. Learn about the market. Formulate your expectations for the stock market. Focus your thinking.