A sound investment strategy can make the difference between success and failure, informing your asset purchase decisions and building an enviable portfolio that will support you for the rest of your life.
Let's take a look at some of the advantages of preparing your own investment strategy and sticking to it:
Investment strategy advantages
Investment strategies can help you make quick decisions about whether or not to purchase an asset for your portfolio, reducing decision fatigue and the fear that you've made the wrong choice.
Being goal-orientated can help an investor to more accurately establish their future capital needs and make it easier to set a realistic budget for developing a portfolio.
Investors with concrete strategies often see larger returns from their investments and experience less exposure to risk, as they're quickly able to discard assets from their wishlist that don't fit with their plans.
Disadvantages of an investment strategy
Although having an investment strategy is usually considered a good idea, there are certain disadvantages which are worth considering:
Some people will form unrealistic strategies with lofty goals that can never be met. That could lead to risky asset choices or rash selling decisions at the slightest dip in the market.
Sticking rigidly to a poorly-thought-out investment strategy could be just as bad as having no plan at all, especially for people with stubborn mindsets who refuse to modify their plans. Examples of this would include desperately clinging to a poorly performing asset just because it's a good fit for your portfolio, or failing to invest in a well-performing share due to inflexibility in your strategy.
How to develop a winning investing strategy
Building a basic investment strategy will require you to figure out what kind of investor you'd like to be, the asset classes that you find most interesting and the outcome you'd like to achieve. Here are a few questions that should help you:
How long do you plan on holding your portfolio before cashing in some or all of the assets?
What returns are you hoping to achieve?
What level of risk are you willing to tolerate?
What are the funds in your portfolio going to be used for?
Do you have any personal interests or socially responsible goals that you'd like to incorporate into your plans?
Answering these questions will make developing a rudimentary investment strategy much more straightforward.
How you should split your portfolio between different assets or asset classes will ultimately depend on your risk tolerance and how comfortable you feel about "having all of your eggs in one basket". A less aggressive investor might prefer to hold up to 75% of their portfolio as fixed income assets, with just 15% in more volatile stocks, for example.
The perfect investment strategy should contain a degree of flexibility and focus on the journey, rather than the destination. Although a well-thought-out plan can be a valuable tool to the investor, ultra-rigid strategies can expose you to unnecessary risk.
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