How To Choose An Investment Strategy

Since you are reading this I hope you are already investing, or at least considering investing in the near future! I know the whole thought can be overwhelming, but there are ways you can make it less so. Here’s how to choose an investment strategy, and how it can help you along the way.

What is an investment strategy

So what is an investment strategy in the first place?

It might sound fancy but it is simply your plan on how you are going to reach your financial goals through investing.

There are many ways you can invest and not all ways are necessarily ideal in order to reach your specific goals.

This is why you need a plan, or a strategy.

For example if you want to replace your income with regular dividends, it probably doesn’t work if you invest in shares that don’t pay dividends at all, right?

What kind of strategies are there

There are many theoretical strategies to use. But I don’t think any of them are cookie cutter solutions that would suit everyone as they are.

Many of the strategies are not complete strategies on their own either.

I’m talking about strategies like dollar-cost-averaging, passive vs active, income and growth investing.

You can use them to create your own strategy as a combination that suits you.

Read a bit more about each kind of strategy here.

How to choose an investment strategy

But how do you choose a suitable strategy for yourself so you can reach your financial (and life) goals?

Often we have multiple goals and we might need to tweak our strategy based on the goal and how long we have before we want to reach certain goals.

This might even mean we have multiple strategies in place at the same time to simultaneously work towards short, medium and long term goals.

Here’s what to consider.

Your time horizon

Your time horizon is one of the most crucial things to consider when it comes to investment decisions. It affects the type of investments you should put your money in.

If there is only a few years before you need your money for whatever reason, volatile shares may not be the way to go as you can’t afford to ride out any market dips.

But if you have decades to a big goal, then a savings account most likely won’t get you there and you need to take on a little bit more risk (and you can).

Your risk profile

Next thing to consider is your risk profile. How much risk are you comfortable with?

There are recommendations out there based on age and time horizon but you should really consider if they are suitable for you.

There’s no point in doing something that makes you uncomfortable and constantly worried.

That would be the complete opposite to what we are actually trying to achieve with money management and investing.

If you are uncomfortable taking on risk when it comes to long term goals, you might have to accept that it will take longer for you to get to your goal, or that you will have to try to make up the difference in other ways (such as saving more by increasing your earnings and/or reducing your expenses).

Another option could be to educate yourself. When we learn more, we might become more comfortable with things (like investing) that were unfamiliar and scary to us before.

Your values

What you value comes into play when you do your security selection. “Security” means individual investments, such a specific company shares or a specific investment fund.

Is there something you don’t want to invest in? Or something you specifically want to support?

You can screen your options based on your values and only invest in those acceptable to you. And this screening will be part of your strategy.

Your goals

What kind of approach do your goals need in order for you to be successful? A lump sum at a certain time or passive income?

For example, two different goals: $100,000 house deposit and retiring early at the age of 55 with a yearly passive income of $80,000.

These two goals will require different approaches.

House deposit would require a lump sum at a desired time and you will be restricted by the fact that you need to protect the capital, especially as you get closer to wanting to use the money.

Creating passive income has different requirements. You can get there by either buying assets that produce passive income to you (shares with dividends, property that pays rent etc) or by increasing your capital to the point where it can sustain regular withdrawals.

You should also be very clear on your priorities. Which goals are the most important? Consider how long it will take to reach a goal if you focus just on that instead of splitting your focus between many.

Remember, that there is always a trade-off!

Other considerations

Other things you might consider within your strategy are the timing of your investing (regular or lump sums) and how active or passive you want your strategy to be.

For example completely passive approach would be dollar-cost-averaging with an automatic investment order on your chosen platform. You create it once based on your time horizon, risk profile, values and goals and then it’s hands off (except maybe review once a year that it still aligns with your goals).

You could have a mixed approach too, with maybe dollar-cost-averaging part of your portfolio, then actively picking and choosing part of with the occasional lump sum you have available. This is known as the core-satellite approach.

No matter the strategy you choose it should be reviewed at least once a year (maybe more often if the goals are short or medium term) to make sure you are still headed to the right direction. After the review you’ll know if you need to tweak your approach at all.

The review is necessary also after each goal is reached so you use your resources most efficiently and can re-direct them to the next goal.

At the end of the day, you can make investing as simple or as complex as you’d like, but at the end of the day ideally the strategy you choose should help you get to your goals.

If you have any questions relating to choosing an investment strategy, leave them below!