How do you choose an investment strategy?
Investing is personal, there is no “one size fits all” answer to the question: What is the best investment strategy? Therefore, it is important to choose the investment strategy that best suits you. Learn in this article the following are some guidelines that will help you know how to choose the investment strategy that is ideal for you.
1- Define your goals
The first thing to do when choosing the right investment strategy is to define your investment goals, to develop a strategy that will allow you to achieve them. Some investment goals might include getting married, buying a house or car, having children, or planning for retirement. Each of these objectives requires a different strategy and each has a time horizon.
2- Determine your investment time horizon
Once you set a goal, you have to think about how long it will take you to achieve it. Buying a car, for example, will take only a short time, while investing for retirement will take decades.
The rule to remember here is that investing for the long term allows you to take more risk, while for the short term investment, it is better to keep a low risk approach.
3- Determine your risk level
You now have a goal (retirement) and a time horizon (30 years), you should then consider the different levels of risk involved in different strategies when you choose the right investment strategy.
Remember, we hope the markets will go up, but we know they can go down. So it is important that we can weather the bad times when our portfolio loses money, by matching investments with our risk tolerance.
Short-term investments are riskier, as we do not know whether the markets will go up or down in a short period of time, while long-term investments have a higher chance of making money, the longer the investment, the less likely you are to lose money.
4- Keep your costs low
An important part of choosing the right investment strategy is choosing a low-cost strategy. Even if you make the best investments, high costs can eat away at your gains.
A study conducted by the Securities and Exchange Commission (SEC) showed how a 20-year investment portfolio of $100,000 with a 1% fee grows $30,000 less than a portfolio with a 0.25% fee. So if your portfolio is expensive, choose a cheaper strategy.
5- Passive investment and active investment
When you choose your investment strategy, you should take into account whether the investments you choose are passive or active.
Index funds and ETFs have outperformed many active investing strategies. In 2007 Warren Buffett bet a $1 million asset manager that a passively managed fund would outperform a handful of hedge funds over the next decade. Buffett won the bet, proving the value of passive investing strategies, especially for investors who don’t want to spend all day tracking the stock market.
6- Invest according to your values
Your investments should reflect who you are as an individual and support what you believe in. Many ETFs, for example, use strategies that focus on socially responsible investing (SRIs), and there are also many Sharia-compliant investments, which follow the principle of halal in Islam. So make sure that you are investing in things that support your values as a human being when choosing the right investment strategy for you.
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