You can learn how to create a personalized investment plan by downloading and reading the Vanguard Investment Planner , a booklet that helps you develop a custom-designed portfolio based on your objectives, time horizon, and risk tolerance. Generally speaking, the longer investors have until they need to tap the investment, the more risk they can afford to take. That means you should revisit your plan at different stages of your life to see whether the target allocations need to change. After you develop your plan, you can look at your portfolio and decide whether you need a stock, bond, or money market fund to provide the appropriate asset allocation for you. Your subasset allocation will be based on a combination of your risk tolerance and the length of time you plan to invest.
Stock funds are generally divided in two ways.
First, they're divided by size, which is determined by the market capitalization of the stocks in which the fund invests. Growth stock funds include companies that, because of strong earnings and revenue potential, are expected to produce above-average capital appreciation. Value stock funds seek companies that, given their assets and earnings histories, are attractively priced. For bond investments, you should take into account different bond fund maturities as well as the pros and cons of government versus corporate bonds. Investors in higher tax brackets often look at the breakdown between taxable and tax-exempt bonds, but that issue is moot for retirement plan investments, which are already tax deferred.