Step1
STOCKS VS. BONDS - Investing in stocks over the long run is the best way to outpace inflation and grow your portfolio. However, along the way you will be subject to market volatility up and down. How much volatility can you tolerate?
Bonds investing is more steady and usually comes with less risk. However, your returns will reflect the lower level of risk and you will earn smaller returns over the long run. Sometimes you may barely keep up with inflation!
Clearly if you have a long term outlook, you should consider some allocation to stocks. But how much?
Step2
DETERMINE YOUR TIME HORIZON - How long can you commit your funds towrads you investment? If you are investing for any period less than 3 years, forget about stocks! Stick with a CD or short duration bond fund for ALL of your money.
If you are investing for more than 3 years, and hopefully more than 5, then consider stocks an appropriate investment for your funds.
Step3
DO YOU HAVE EMERGENCY FUNDS - you've determined you can invest for over 3-5 years, but wait! Before investing ask whether you have emergency funds set aside to support you for 3-6 months in the event you became temporarily unemployed or needed to take an extended leave, for example to take care of an ailing family member. Before commiting any of your money to risky investments, you should establish a reserve pool of funds that will keep you and your family safe during uncertain times. Most investors do not do this and consequently they may be forced to sell their investments during a downturn a realize losses in order get through a 3-6 month situation. Set aside your emergency funds first!
Step4
HOW CLOSE ARE YOU TO RETIREMENT - If you are 20 or 30 years away, you can feel more comfortable investing a larger portion of your funds in stocks, say in the 50%-80% range. If you are 2-5 years away, you probably want to be more conservative, perhaps in the 20%-50% range.
Step5
DO YOU HAVE CREDIT CARD DEBT - If you have high interest rate debt, like credit cards, you are probably better off paying these debts off before investing in the stock market. Make paying your debt obligation a priority because the loan is probably costing you more than you can expect to make in the stock market!
Step6
MAXIMUM STOCK ALLOCATION - Many young and aggressive investors think "oh, I don't need any of those boring old bonds, I'm going to invest 100% in stocks!" That's a bad decision.
Students of modern portfolio theory can demonstrate that you are probably unwise to invest more than 80% of your money in stocks. Why? Because on average a 100% stock portfolio will just barely outperform an 80% stock portfolio and will gyrate far more than the mixed portfolio. In other words, the incremental return does not justify the incremental risk. Or put another way, the portfolio is "not efficient". You want to get as much return you as you can for the amount of risk that you take, and a 100% stock portfolio is not a good choice!
Enthusiast 
