Your strategy or investment approach is far more important than any one investment decision you make. That’s because an investment decision is a one-off event. Your make the decision. You buy or sell. And then you go about your business.
But your investment strategy has a far greater impact on your financial situation. It stays with you for a very long time and influences your life along the way. Think of your strategy as the computer program in your head that runs over and over and over again every time you need to make an investment decision.
Every investment action you take is a result of your strategy. If you’d like to discuss your investment approach with an objective professional, please drop me a note and let me know.
What Exactly Is An Investment Strategy?
Your strategy is basically a rule book. It tells what to buy, when to buy it and when to sell it.
If your strategy is solid, you’ll make more money with your good decisions over a very long time than you will lose with the bad decisions you make. (And everyone makes bad decisions when it comes to money – it’s inescapable.)
If your strategy is fundamentally flawed, you’ll lose more than you make over time. That can lead to only one place – working at Flippy Burger after you retire. Not a good tone friend. That’s why it’s important to find the right strategy and stick to it.
What Is The Best Investment Strategy For You?
There is no one best investment strategy for everyone. You need an investment approach that suits your financial goals on the one hand and your ability to sleep at night on the other.
Here’s what I mean. Let’s say you like how well equities have done over the past several years and decide to plunk your savings into an aggressive mutual fund. So your “strategy” told you what to buy and when. But this kind of “strategy” can lead to problems when the issue of selling comes up.
As soon as the market turns tail and heads south, your “sleep at night” needs get triggered. And if you aren’t able to withstand the volatility, you’ll likely sell out at the very worst time. This strategy is basically no strategy at all. It’s really just an emotional response to money and it usually ends up badly.
Granted, we all get emotional about money at times. Even yours truly. That’s why your strategy must be compatible with who you are deep down. Comprende?
More About The Make Up Of A Smart Investment Strategy
Your strategy defines which investments are and are not appropriate of course. But it goes further than that as I said. Your investment method must also tell you what to do once you own those investments. Let me illustrate again.
Let’s say you think through your situation and decide to take a balanced approach to investing. That means you’re going to have 60% equity and 40% fixed income. Great. But you still need to know which securities to buy, when to buy them and when to sell them. Right? Your strategy has to answer these questions.
- If you use a buy and hold approach, you would likely buy index funds or ETFs and never sell.
- If you are interested in being more proactive, you’ll probably buy top-performing funds. You’ll re-evaluate your holdings monthly or quarterly and replace the laggards with the then better performers.
- If you use a “gut feeling” approach you’ll do what feels right at the time as illustrated above. This is a very tough investment approach to do well with overtime. That’s because your “gut feeling” is really just your emotional response to whatever is going on at the time. My experience tells me that you’ll do far better with a well-thought out approach rather than an emotional one when it comes to your cash, cousin.
What is your investment strategy? What do you like about it? What would like to see improved?