One of the key mistakes I made early on as an investor was to invest without a strategy. Thankfully I realized this mistake and built a solid strategy. Investing with the wind can be a very risky affair. For me it helped me keep my emotions at the door and stick to my plan no matter what my gut said.
Personal investment plan or strategy. The phrase might sound somewhat intimidating, particularly if you’re a newcomer stepping into the world of finance and wealth management. Yet, regardless of whether you’re a seasoned investor or someone just starting, having a solid investment strategy is pivotal. Not only does it provide a roadmap to navigate the choppy waters of the financial world, but it also offers the tools to make informed decisions that align with your financial objectives.
So, how do you create a personal investment strategy for the stock market and stick to it?
The importance of an investment strategy
Having a personal investment strategy is like using a GPS on a road trip. Without a set route you might stumble across a few scenic sights, but you’re more likely to get lost and waste time and resources. In the financial world an investment strategy helps prevent unnecessary risks and losses while propelling you towards your financial goals.
A good investment strategy is unique to you and tailored to your risk tolerance, investment goals, and timeline. It should provide clarity, reduce impulsive decisions, and be adjustable according to personal circumstances.
Creating your personal investment strategy
Creating a personal investment strategy may seem like a daunting task, but it’s straightforward once you break it down into manageable steps such as the following:
Set clear financial goals
The first step in creating a personal investment strategy is to define your financial goals. These can be short-term (a new car, a vacation), mid-term (a down-payment for a house), or long-term (retirement). Be specific about what you want to achieve and by when.
Determine your risk tolerance
Understanding your risk tolerance is crucial. Risk tolerance is your ability and willingness to lose some or all of your original investment in exchange for greater potential returns. Assessing your risk tolerance involves understanding your financial situation and your emotional ability to withstand potential losses.
A rule of thumb is to never invest more money than you can spare. If you were to lose it all, would it impact your life negatively?
Understand different investment options
Your risk tolerance should influence your approach to investing. There is a popular saying that you should invest your own age in bonds versus stocks, so if you’re 30 then 30% of your investments should be in bonds and 70% in stocks. Although, personally, I am always 100% invested in stocks as the yield over time is much higher.
However, you have a wide array of different options when it comes to investing such as bonds, individual stock picking, funds, real estate, collectibles, cryptocurrencies etc.
Whatever you choose it is important that you investigate and understand the risks, returns, and how these options fit into your overall financial plan.
Diversify your portfolio
Putting all your eggs in one basket is a risky business. Diversifying your portfolio across different investment vehicles and sectors can help reduce risk and potentially enhance returns.
If you are looking for an easy way to effectively diversify your stock portfolio, then Exchange-Traded Funds (ETFs) are a popular choice.
Consulting with a professional financial advisor
While it’s entirely possible to manage your own investments, you might also consider consulting a financial advisor, especially as your portfolio grows or your financial situation becomes more complex. They can provide personalized advice based on your goals and risk tolerance.
However, keep in mind that this advice usually comes at a price. Personally, I manage my own investments, and so can you if you are willing to put in the effort. Not only is it more fun and rewarding, but you will also make more money and will be able to reach your financial goals faster.
Sticking to your investment strategy
Once you’ve crafted your personal investment strategy, the challenge is to stick to it. Here’s how:
Regularly review your strategy
Even the best-laid plans can go sideways. Regularly reviewing your investment strategy is vital. Look at your performance, assess whether you’re on track to meet your goals, and adjust your strategy if necessary.
If you find this part difficult then I suggest you schedule time in your calendar to do it on a regular basis that suits your needs – once a month, quarter, year etc.
Avoid knee-jerk reactions
The financial market is notoriously volatile. But reacting impulsively to market fluctuations often does more harm than good. Unless there’s a significant change in your personal circumstances or a drastic market change that affects your investments’ fundamentals, stick to your strategy.
Stay patient
Rome wasn’t built in a day, and neither is wealth. It’s important to remember why you are investing and what you are trying to achieve with your financial goals. Stay patient and resist the urge to constantly tinker with your investments.
Classic investment strategies
To help inspire you in developing your own strategy, let’s take a look at some classic investment strategies that many successful investors have followed. Remember, these are just starting points and they should be tailored to your personal goals, risk tolerance, and timeline.
Value investing
This is the strategy followed by the legendary investor, Warren Buffett. The central premise of value investing is to buy stocks that appear to be undervalued compared to their intrinsic worth. These are often stocks of companies that have solid fundamentals but are currently out of favor in the marketplace.
Growth investing
Growth investors look for companies that are expected to grow at an above-average rate compared to other companies. They are less concerned about the current price of the shares, believing that the rapid growth will lead to higher returns in the future. This approach requires careful research and a willingness to take on risk.
How to invest in growth stocks
Dividend investing
This strategy focuses on buying shares in companies that regularly pay dividends. Dividends are a portion of a company’s profits that are distributed to shareholders. Dividend investing can provide a steady stream of income in addition to any gains from the shares increasing in price.
Dollar-cost averaging
This strategy involves investing a fixed amount of money in a particular investment at regular intervals, regardless of the investment’s price. This approach can reduce the impact of volatility and eliminates the risk of making a large investment just before a market downturn.
Asset allocation
This is a strategy that involves dividing your investment portfolio among different asset classes, such as stocks, bonds, and cash. The composition of these investments depends on your financial goals, risk tolerance, and investment timeline. The goal is to reduce risk by diversifying your portfolio.
Index investing
This strategy involves investing in index funds, which are designed to track the performance of a specific market index, like the S&P 500. This is a passive investment strategy that offers diversification and lower costs compared to actively managed funds.
The investment strategies used by the most legendary investors
If you’re looking for more inspiration, let’s have a look at the investment strategies of renowned investors which can offer valuable insights. Let’s consider four of the most iconic and legendary investors and their distinctive investment strategies:
Warren Buffett – value investing
Warren Buffett, CEO of Berkshire Hathaway and widely regarded as one of the most successful investors in history, is a stalwart advocate of value investing. A disciple of Benjamin Graham, the father of value investing, Buffett seeks to invest in companies that appear undervalued by the market but have strong business models, management teams, and competitive advantages.
“Price is what you pay, value is what you get”
Warren Buffet
Peter Lynch – growth investing
Peter Lynch, the legendary former manager of the Fidelity Magellan Fund, is best known for his growth investing approach. He believed in investing in what you know and spotting growth opportunities in everyday life. Lynch was known for his “ten baggers” – investments in growth companies that could return ten times the initial investment.
How to invest in growth stocks
Ray Dalio – risk parity & diversification
Ray Dalio, the founder of Bridgewater Associates, the world’s largest hedge fund, is renowned for his risk parity strategy. His “All Weather” portfolio approach seeks to create a balanced and diversified mix of investments that can weather any economic climate. Dalio’s strategy relies on a mix of stocks, long-term and short-term bonds, and commodities to ensure that the portfolio remains balanced regardless of market conditions.
How to diversify your portfolio
John Bogle – index investing
John Bogle, the founder of Vanguard Group, is a champion of index investing. He believed in the value of low-cost, passive investing that mimics market indexes. Bogle’s strategy advocates for investing in the entire market, rather than trying to pick individual winners, emphasizing the importance of keeping costs low and focusing on long-term returns.
“Don’t look for the needle in the haystack. Just buy the haystack!”
John Bogle
These investors, each with their own distinct strategy, underscore the diversity of approaches to investing. They highlight the importance of understanding your own investment objectives and risk tolerance, and the value of staying committed to your strategy over the long term.
In conclusion
Remember, there is no ‘one size fits all’ strategy in investing. A personal investment strategy may involve a combination of the mentioned approaches, tailored to fit your unique financial situation, goals, and risk tolerance.
Having a personal investment strategy is not just about securing financial growth; it’s about forging a financial journey that resonates with your life goals and aspirations. Remember, while the market’s waves are uncontrollable, your strategy is your personal sail, and you hold the power to navigate it wisely. So, take the helm and chart a course for your financial future with confidence and clarity.
