Everyone who decides to invest has one central aim: to make money. Developing an investing strategy is the bedrock of any successful effort to do just that. So, how does one go about developing an investment strategy?
There are a few tried-and-true prescriptions that every investor would be wise to consider when thinking about how best to invest. Whether you are a new investor looking to crystallize your approach or a seasoned veteran well-versed in the movements of the market, adhering to these timeless principles will help guide you in the right direction.
Define Your Objectives
It may seem obvious, but defining your objectives should be your starting point. Try to be as detailed as possible at the outset, as this will help you understand the types of investments and assets that you should be looking to acquire.
For instance, there is a marked difference between setting aside money for a down payment on a house in five years versus putting aside money for retirement in twenty. Each of these distinct goals would require pursuing a different type of investment strategy.
The timeframes for each will help define your choices (see below), though knowing how the investment will eventually be used will allow you to decide the best way to realize your ambitions.
Having a specific dollar amount in mind can help with this exercise. For instance, let us say that you have $100,000 to invest and you wish to have $1.5 million in 30 years for your retirement. If you plan on investing an additional $500 a month, you will need to enjoy an average return of 7.5% in order to arrive at this amount.
You can use TipRanks’ compound interest calculator to help you explore different combinations to understand the rate of return needed to reach various sums and investment objectives.
Understand Your Timeframe
Understanding your timeframe is vital when forming your investing strategy. This will not only influence your actual decisions, but can help you become comfortable with different levels of risk.
For starters, knowing your timeframe will help you understand how long you can manage without your money. The idea of investing revolves around placing money in another account or asset, with the hopes that after a certain period of time (weeks, months, or years) you will receive more than you had initially deposited.
For example, if you know that you will need to have cash available in a year to pay for a large home renovation, then you would probably not want to invest money into a real estate project whose payoff is years down the road.
Moreover, your age will be a factor in your investment strategy, as individuals in their initial years of investing are better situated to invest in more riskier assets. For instance, a 25-year old with little debt and no dependents can afford to invest in more aggressive assets. If his portfolio takes a hit, he still has plenty more working years ahead to make up for these losses.
In contrast, a 60-year old approaching retirement who is still paying off a 30-year mortgage would therefore need to be much more conservative in her approach. If she were to lose significant chunks of her investment, it might imperil both her ability to service her debts as well as her retirement years as she has only a few working years left.
Know Your Risk Tolerance
Every investment you make contains a certain amount of risk. Even leaving money in your savings account carries its own risk, as rampant inflation would decrease the value of your cash (not to mention the risk that you might spend it on impulse buys!).
While your objective and timeframe should influence your appetite for risk, you also need to understand how your decisions might impact you emotionally. Every individual has their own unique personality, and only you can know for certain how you will feel if you are invested in riskier types of assets.
For some, major losses in their portfolio would be nothing more than a blip their radar, an acknowledged part of the investment process. For others, even the mere risk of a downturn would cause them to lose sleep, stop eating, and become a shell of themselves. There is a full spectrum of reactions that exist between both of these two poles.
Risk is another word for uncertainty, and it represents a potential outcome which cannot be known in advance. The idea of risk therefore comes down to your level of comfort with the unknown, which is less measurable by definition than other investment criteria.
Conduct Your Research
Your money is a precious resource. Therefore, before placing it into any investment or listening to an analyst, make sure to conduct your research to know who to trust.
If you are certain that you wish to invest most of your money in the stock market, look at the historic performance of the types of stocks or portfolios that you are leaning towards. While past is not prologue, this can give you a good idea of whether your desired investments have the potential to provide the returns you are seeking.
This holds true for different types of investment vehicles or assets, such as mutual funds, REITs, or even commodities. Part of this effort should be devoted to making sure that you understand the types of investments you are choosing. If you do not grasp the intricacies of where you are thinking about placing your money, it is probably a good idea to avoid investing in it.
TipRanks has a litany of tools to help you gauge the historical performance of stocks, mutual funds, and other investment vehicles, allowing you to gain insights into their assets, liabilities, and their prospects for future growth. Whatever decisions or direction you take, make sure that you do so as an informed consumer.
Be Patient, and Consistent
Investing–regardless of your chosen timeframe–should be done with a steady hand. News occurs, interest rates change, and the market (stocks, bonds, and alternative assets) will all go up and down. If you have made your investments with sound reason and sturdy rationale, there should be no reason to panic.
Investments can have bad weeks, months, or even years. While it might be tempting to recalibrate after a spate of bad returns, if you take your money out after it has plunged in value you will lose the opportunity to recoup your losses if the market recovers.
Arguably the biggest secret to investment success is the magic of compound interest, whereby your earned interest will begin to accumulate money as well. This allows you to progressively earn more and more as the years go by, assuming that your money stays invested.
Patience is a virtue, the saying goes. It is also an important component of a successful investment strategy.
Conclusion: Designing Your Best Strategy
Investment strategies come in all different shapes and sizes, which can be designed to fit each and everyone’s particular objectives, starting points, and tolerance for risk.
There is no magic formula for arriving at the right strategy. There are, however, a number of considerations everyone should factor into their decision-making when it comes to their money, and how they want to use invest it.
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