Introduction: Why an Investment Strategy is Everything
Investing, is a very important part in the journey toward wealth and financial freedom. Investing, however, can be like walking in a pathless jungle. A clearly defined investment strategy will help to navigate market conditions and enable you to make well-informed decisions that fit in with their objectives. Investing101: Even if you are an experienced investor or just starting by developing and implementing good investment strategies benefits everyone in the long run.
Investment Strategy Basics
Investment strategies are structured plans constructed to spread out assets in such a manner that they return the maximum sum of returns with minimum amount of risk. The strategies are as individual as the financial goals, risk tolerance and time horizon of a specific investor. A systematic approach can also help investors overcome emotional decision-making which often leads to poor investment results.
Looking deeper, risk and reward trade-offs are fundamental to an investment strategy that can help your portfolio grow while safeguarding it from market volatility. Other strategies are centred on capital preservation, or have an eye toward aggressive growth. The correct strategy for you will be different depending on your specific circumstances and goals.
Components of a Successful Investment Approach
In order to come up with a superior investment strategy, it’s important that you know what are the main factors for this purpose. They are asset allocation, diversification and risk management features to be combined with regular portfolio review.
Asset Allocation
Asset allocation refers to the way we spread an investment portfolio across different asset classes, such as stocks, bonds or real estate. The purpose of asset allocation, instead, is to help you find the right balance between risk and return by dividing your investments among major asset categories such as stocks (equities), fixed income (bonds), cash or equivalents like money market funds based on an investor’s investment time frame.
A younger investor who is planning to invest money 30 or more years into the future, may opt for a larger equity allocation because historically, equities have offered higher returns but with greater risk. On the other hand, a retiree would probably want to go even more conservative by holding as large of a percentage in bonds and cash than allowed with the intention of continuing to generate at least some income, while also trying not lose too much equity should markets take another dive.
Diversification
DIVERSIFICATION: Investment diversification is when you put your capital into different types of assets, industries and geographical regions in order to have a low correlation within the allocation of risk. Diversifying your portfolio is a good hedge against downturns in any particular asset or market. This approach keeps your entire investment fund well-diversified, so the under-performance of a few investments does not threaten to break you financially.
For diversified stock, bond and other investment portfolios it may also include some international stocks or bonds as well movement real estate over traditional unregistered investments such as commodities or hedge funds. The trick is not to bet so heavily on one horse, because that simply signals unnecessary pain.
Different Investment Strategies for Popular Goals
Again, there is no universal investment strategy as the best one for you will hinge on your goals and risk tolerance. Some popular investment strategies for different objectives are given as under.
Value Investing
Value investing is the practice of purchasing shares of common stock that are below their intrinsic value and trading for less money than they should be in an effort to sell them at a higher price. Value investors think that market gets carried away with the bad news and drives prices of stocks to levels far below their true worth. This allows investors to buy stocks when they are trading at incredibly low prices and make a good return on their investment after the market self-corrects, restoring the price of that stock only reflecting its true value.
Of course, value investing is a long-term strategy where you need to have patience as it may take a while for the market to become rational and acknowledge that this undervalued stock found its true price. Value investing is most usually attributed to long term investors such as the legendary Warren Buffett who has an unrivalled track-record of outperforming.
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Conclusion: Fine-Tuning Your Investment Strategy For Winning In The Process
Effective investment strategy is subjective and changes per individual, according to their financial aims; risk aversion & time horizon. So whether you are a value investor, growth investor or income focused individual… all that really matters is making sure to stay disciplined and manage your risks properly while maintaining your loyalty toward what was a long term ultimate goal.
It will help you handle the complexity of financial markets, and make a sturdy portfolio that lasts for years to come by adding asset allocation, diversification and frequent review process in your investment approach. Just keep in mind, the best investment strategy is one that fits your specific financial situation and will help you meet your personal goals.
