An investment strategy to preserve and build your wealth is key to any financial plan. In this article, we outline four important steps for creating an investment strategy for optimal returns that can endure the risks of the market.

Step 1: Establish Your Risk Tolerance

What is the amount of risk you’re willing to take in exchange for the potential to earn higher returns? And what is it the amount of risk you’re able to take based on your financial situation and investing time frame? Both risk factors are important when choosing investments for your portfolio.

Some investors can patiently wait out short-term declines in the value of their investments, while others get nervous at the first sight of a loss. Decide where you fall on this spectrum to determine your preference for risk-taking.

No matter your personality, an investment strategy should take enough investment risk to help you reach your financial goals but not more than your finances can sustain. Generally speaking, the more money you have at your disposal, the more risk you can withstand. Similarly, if you won’t need your money for 30 years, you have more leeway than someone who needs to sell his or her investments for income in 10 years.

It’s best to take a comprehensive risk assessment before embarking on any plan. If you know your risk tolerance, you can work with a financial advisor to build a strategy without straining your finances — or your nerves.

Step 2: Allocate Assets Appropriately

An investment allocation strategy should be true to your risk tolerance while helping you build and retain your money for a lifetime. At our firm, we divide assets into three categories — Preservation, Stability and Growth — to ensure a mix of investments that fit your specific time frame and lifestyle. If your risk tolerance is low, you will likely hold more investments in the Preservation and Stability categories than would someone with a higher risk tolerance.

Always have your asset allocation plan in writing so that you and your advisor have clear communication about your risk tolerance and portfolio expectation. A written plan will also help you stick with your strategy, giving you the potential to reap long-term benefits.

Step 3: Create A Growth Projection

Work with your financial advisor to project the growth of your investments and assets over your expected lifetime. Your goal in this crucial step is to ensure that you will not outlive your money while enjoying the lifestyle you expect and perhaps leaving money to your children and grandchildren. Make sure your projections are periodically reviewed and fine-tuned when necessary. A solid growth projection will help you stay on track and give you confidence in your financial plan.

Step 4: Designate Your Beneficiaries

It’s important to periodically review your beneficiary designations — also known as the people who will receive your money after you pass away — to make sure they are current and accurate. If possible, your estate planning will benefit from holding investments jointly with a spouse. If your spouse is a joint owner of certain assets, there is no income tax payable on those assets upon your death because they won’t be a part of your estate. With the hurdles of a probate process or probate fees removed, your spouse would have access to these funds immediately rather than months later.

Where joint ownership is not possible, make sure that you’ve named primary and contingent beneficiaries on your investment accounts, as well as your retirement accounts and insurance policies.

By ensuring your investment strategy includes these four steps, you’ll have a sound foundation for your financial plan.

— By Erin Eddins

Erin Eddins is a Certified Financial Planner and Chartered Financial Consultant with Stancorp Investment Advisors in Lynnwood.