When deciding your investment strategy there are a number of factors you need to consider. You may choose to seek professional investment advice to help determine the best investment strategy for your particular needs or you may prefer to go it alone. Here is a brief overview of what you need to know to get started.
It all starts with the right asset allocation
Probably, your most important decision is determining how you allocate your investment dollars to each of the asset classes. This decision requires time, planning and, possibly, expert advice. Studies show that up to 76% of the variation in returns between different portfolios can be attributed to your asset allocation.
You may choose to invest in a diversified fund where a professional fund manager decides the asset allocation and investment selection for you. This way you don't have to worry about trying to time the markets and rebalancing your portolio.
Investors who want more control over their investments may decide to make up their own asset allocation by selecting individual asset class funds. If you decide to use this approach, you will need to be disciplined and monitor your investments on an ongoing basis and rebalance your investments in line with your asset allocation targets. Alternatively, you could ask your financial adviser to do this for you.
Why are you investing?
It's vital to know why you are investing because this decision will help to determine the makeup of your investment portfolio. Examples of goals include:
- to build sufficient assets for a comfortable retirement
- to finance a child's education
- to save a deposit for a first home, buy a larger home, or buy a holiday house
Determine your investment time frame
Your time frame is the number of years you have available to invest. It includes the time until you reach your goal - as well as the period, however long or short, when you may need to make withdrawals from your investment.
The longer you have to invest, the more time you have to weather the markets' fluctuations. As a result, the longer your time horizon, the more likely you are to consider investing in higher risk growth assets such as shares, which can provide long-term investment rewards.
How comfortable are you with risk?
Your emotions play a significant role in how you allocate your investment assets. Some investors find it easy to ignore market fluctuations and to focus on their long-term investing goals. Others become anxious when their portfolio declines in value by even a small percentage.
If the possibility of a significant drop in your investment value would keep you awake at night, you might choose a more conservative asset mix. However, in doing so, you run the risk that inflation might erode a greater percentage of your returns. Remember, that risk and return are related. The higher the risk, usually the greater the return - and vice versa. One way to reduce your risk level is to diversify your portfolio across a variety of asset classes and securities.
What is your financial situation like?
Your age and stage in life are key factors when establishing an investment strategy. Your current and future financial situation should always be considered when building a long-term investment portfolio. In the short-term, it's important to remember that you may need to have easy access to some of your portfolio for emergencies or short-term expenses. Sometimes life doesn't always go to plan, so remember to review your investment strategy if there are any major changes in your circumstances. If you need help, a professional financial adviser will be able to determine the best investment strategy for your stage of life and financial situation.
Like more information?
Read the Building your investment portfolio Plain Talk® guide.
