Your ideal investing strategy will be unique to you: your life phase, goals and risk tolerance will all play a role in informing your “ideal” methodology.
But with so much conflicting advice everywhere you look, how are you supposed to know which strategies will work best for you?
Here are some steps to nailing down your best investing strategy:
Finding Your Best Investing Strategy Tip #1: Figure Out Your Goals
Your goals are a great place to start. Big, broad dreams and more specific, immediate goals are both instrumental in figuring out the best way forward with your portfolio.
For example, if your 401(k) is sitting in cash or treasury bonds and you retire in 15 years, you might need to make some changes to hit your retirement goals. Or, if you plan to buy a house within the year and your down payment is sitting in the stock market, you might run the risk of losing that money in a down market before you buy.
Make sure that the investments in your account reflect what you are trying to accomplish, both short and long term.
Finding Your Best Investing Strategy Tip #2: Understand and Diversify Your Asset Allocation
In addition to your goals, the asset mix in your portfolio should reflect your time horizon and risk tolerance. But you generally don’t want your portfolio to skew too heavily in any one direction. That’s where diversification comes into play.
Here is a breakdown of what goes into your portfolio:
Stock: A share of the value of a company which can be bought, sold, or traded as an investment. The most common categories are large-cap, mid-cap and small-cap.
Typically, the bulk of your stocks will be in large-cap, with some mid-cap and small-cap mixed in as well. Here is a very general guideline of cap sizes:
Large-cap: Total value of issued shares is over $10 billion
Mid-cap: $2 billion–$10 billion
Small-cap: $250 million–$2 billion
Growth stock: A company share that is expected to grow faster than average for the market or industry.
Value stock: A stock that appears to be traded at a lower price than its value.
U.S. vs. International stocks: US stocks have outperformed international stocks for more than a decade, but international stocks tend to cost less and can offer a greater potential for growth. A mix of both in your portfolio can help you make the most of global and domestic trends.
Bond: An official document in which a government or company promises to pay back an amount of money that it has borrowed and to pay interest for the borrowed money. You can purchase bonds through a bank, brokerage firm or a bond trader, or you can invest in a group of bonds through a mutual fund or ETF.
Cash: Cold, hard money that is easily accessible.
Alternative investment: An investment in asset classes other than stocks, bonds and cash.
When you’re younger, your portfolio will be weighted more heavily toward stocks, because you have the time horizon to bounce back from market downturns.
But once retirement is on the horizon, most investors start to lean into bonds to reduce volatility and preserve the money they’ve earned.
Finding Your Best Investing Strategy Tip #3: Play the long game
Some people go after quick wins in the stock market, but the truth is, they rarely pay off as much as the slow, steady approach. History has proven that the strongest portfolios are built to withstand decades, or even generations. Staying invested through the ups and downs pays off far more often.
But that doesn’t mean you can’t have some fun with the stock market. If buying and selling is something you enjoy, go for it. Just use “fun” money that’s not intended for your long-term goals.
Finding Your Best Investing Strategy Tip #4: Have a healthy emergency fund
I know that emergency funds can seem like a really dull way to use your money. But they are also a necessary component of a strong, healthy investment plan.
Having an emergency fund in cash or short-term investments allows you to invest from a place of growth and security. If you do fall on hard times, you can pull from the emergency fund first, instead of depleting some of the investments that you’ve worked so hard to grow over time.
Finding Your Best Investing Strategy Tip #5: Work with a professional
If researching stocks and bonds is at the very bottom of your list of things you want to do, you can still have a thriving portfolio. There are plenty of amazing financial planners who can help you set up and manage your investments, and explain the process along the way.
The key is finding the right financial planner, and I have a guide for how to do that here.
About Your Richest Life
At Your Richest Life, Katie Brewer, CFP®, believes you too should have access to financial resources and fee-only financial planning. For more information on the services offered, contact Katie today.