Three Tips for Creating an Investment Strategy
The investment world is a whole different dimension of finances that seems difficult, obscure, and reserved for only the rich. However, investment opportunities are plentiful and investing is not as hard as you may think it is. You need to know how to create an investment strategy to determine how best to invest your money and build up your portfolio.
Investing is important because it is one of the ways to wealth that does not rely on your monthly income. It is part of the financial literacy knowledge that Robert T. Kiyosaki brought to the world, especially for those in the lower and middle class income bracket in his bestseller book – Rich Dad, Poor Dad in which he broke down the myth that one needs to earn a high income to become rich. You can start investing with what you have. By investing, you make your money work for you.
Throwing money into the acclaimed next best thing that you hear people talking about is like a basketball team not having a clear game plan. Creating an investment strategy will definitely help to increase your chances of investing properly for high rewards and keep you from making avoidable mistakes.
Here are three tips that show you how to create an investment strategy that suits you:
i. Determine Your Focus
This strategy is one popularized by Warren Buffet and it involves simply purchasing stocks that are cheaper than they should be. These kinds of stocks may not be easy to find as it will take a lot of research on your side, but it will be rewarding when you do.
You will make use of the buy and hold technique when buying these underestimated stocks as it could take a couple of months or even years for their stocks to rise. If you are patient and willing to keep your money invested for a couple of years, then this strategy could be for you.
As an investor, it is important to understand the basics of value investing and continue to learn and get the best value stock recommendations from experts. Warren Buffet’s stock picks have outperformed the market substantially despite the stock market returning about 8% year over year the last 100 years. You can do it too.
This strategy involves purchasing securities that pay out returns regularly. It is a good way to build wealth over time. Examples of fixed income security investments include bonds, exchange-traded funds (ETFs), real estate investment trusts (REITs), dividend paying stocks, and mutual funds.
These fixed income security investments offer steady streams of income with minimal risk and should consist of a small portion of every investment strategy, depending on the amount of risk you are willing to take.
Investors in this category search for companies that show signs of above-average growth, through profits and revenues, though the share prices may seem to be expensive with regards price-to-book ratios or price-to-earnings ratios. The growth investing strategy concentrates on the appreciation of capital.
When compared with other strategies, it is riskier, as you would be investing in emerging markets, blue chips, and smaller companies that have a high growth potential.
Small Cap Investing:
Small cap investors buy stock of small companies that have smaller market capitalization (typically between $300 million and $2 billion). Even though they are riskier, they attract investors because not much attention is paid to them.
Small cap stocks tend to be overlooked because of the restrictions that institutional investors, such as mutual funds, have with regard to investing in small cap companies and the amount of risk involved. Large cap stocks on the other hand, usually have inflated prices because everyone is giving them attention. Because of the risky nature and volatility of small cap investing, it is advised that it is left to expert stock investors.
Socially Responsible Investing:
Going green is one of the slogans here. Socially responsible investing simply means that investors prefer to put their money in companies that are socially and environmentally friendly.
These companies should be trying to solve a problem and contribute to the sustenance of the earth. This does not keep them from remaining competitive with other securities in the market environment. It is an investment strategy that considers both financial return and environmental/social good to bring about positive social change.
ii. Determine what your goal is.
You can write down your investment goal, ensuring that it is specific, measurable, achievable, relevant, and time-bound. Have an accountability partner to keep you working toward your goal and do what you need to do every day to reach it. In practically no time, you will have achieved your goal, whether it is short-term or long-term.
If your goal is to buy growth focused stocks to provide returns over the next few years, then determine the companies you will invest in and the amount you will set aside regularly for it. Execute this plan by remaining consistent.
iii. Establish your portfolio risk and optimization.
Portfolio risk refers to the possibility of you not realizing your investment goal and the possibility of it not resulting in any capital appreciation. Beta is a measure of a stock’s volatility in relation to the overall market. It helps you understand the risk of your whole portfolio and the risk of each security you are invested in.
If a stock moves less than the market, the stock’s beta is less than 1 and is therefore less volatile than a stock or portfolio with a beta above 1.
High beta stocks are usually riskier but they provide a higher return potential while low beta stocks pose less risks but also lower returns.
Portfolio optimization refers to selecting the best distribution of securities in your portfolio and a balanced portfolio involves investing in bonds and allocations.
The three tips on creating an investment strategy will help you decide how to plan your investment goals to get the best out of them. Beginners can initially focus on just one type of investment strategy before moving on to another one, or even combining them. Investing could be quite the task, but knowing how to create an investment strategy and executing it correctly will save you a lot of time and hopefully generate a lot of wealth.