5 Key Principles of a Successful Investment Strategy
When it comes to investment, you can follow a few fundamental principles to help make your money work for you. These five basic principles can help you create a long-term investment strategy that helps meet your goals.
5 Key Principles of a Successful Investment Strategy
The first step in creating a strategy is to determine your risk tolerance. By doing so, you can identify the asset allocation mix that best matches your needs.
Focus on long-term goals
As you develop an investment strategy, you must consider the long-term goals you want to achieve. These might include a vacation or retirement.
Focusing on your long-term goals helps you prioritize your investments and makes it easier to stay on track for the future.
Financial experts recommend dividing your portfolio into buckets based on how far away each goal is and how much risk you’re willing to take. For example, investing for a short-term purpose (five years or less) should be slightly more risky than one for a medium-term goal (six to 10 years), and so on.
Have a plan in place
A well-thought-out investment strategy will help you make smarter decisions, depending on your investment strategy, including weeding out investments that may perform poorly over time or not fit into your overall financial plan. It can also help you stay on track for a successful retirement.
The most crucial step in developing a well-designed investing plan is to set clear and attainable goals. These could be anything from saving for a down payment on a home to saving for a family vacation or retirement.
Be disciplined
Whether you are investing your own money or seeking out the services of a professional, it is essential to be disciplined when developing an investment strategy. This can help you avoid chasing performance or reacting to market moods, which will erode your wealth over time.
The key to being a disciplined investor is to focus on long-term goals, diversify your portfolio, and have a plan in place. This will allow you to remain patient and remove the temptation to buy and sell based on emotions, such as recency bias, loss aversion, FOMO, and narratives.
Diversify your portfolio
A well-diversified portfolio combines different types of investments, called asset classes, which carry different levels of risk. These include stocks, bonds, and cash alternatives, among others.
Stocks generally have higher risk and offer the highest growth potential, while bonds and cash alternatives are less volatile.
Diversification reduces the risk that one investment or sector will lose value and cause your entire portfolio to decline.
It also reduces the chances that positive news affecting multiple companies will similarly affect each of your investments.
Be flexible
Flexible strategies can respond to changing market conditions. This is important because it means a system isn’t static and can change over time.
This flexibility can help you stay disciplined and avoid making hasty investment decisions when markets are choppy. Being flexible also enables you to take advantage of growth at critical times while limiting your losses when prices go down.
One way to be flexible is to dollar-cost average your purchases over time, spreading out your stock and fund purchase in a series of smaller steps. This can reduce the volatility of your portfolio and increase its average entry price.