Investment strategies are essential. You can use them to generate future income, plan for your retirement, and reduce the impact inflation poses on your wealth.
However, what is the best investment strategy to use and how can you maximise the potential for capital gain?
There are a few golden rules when it comes to investing. First off, you should never put all your eggs in one basket. You should aim to create a portfolio of diversified investments that reduces the impact of market fluctuations.
It’s not a good idea to depend on a single stock or asset. Instead, you should always consider diversifying your investments and mitigate the impact of risk. Similarly, you should only take on as much risk that you are comfortable with, which is suitable to your circumstances.
Finally, your time in the market is more important than trying to time the market. If you want to increase your chances of better performance, avoid trying to time the market and feverishly buying or selling stocks.
Although it may be tempting to wait for markets to change until they are in your favour, more often than not, this strategy is counterproductive. Everybody wants a piece of the pie when stocks are high, yet many choose to sell and cut their losses when prices plummet.
Pound Cost Averaging and continuously investing in the market means you don’t miss out on lucrative opportunities or put your finances in risky situations. This investment strategy can help you fulfil financial goals more efficiently and smooth out losses in the long term.
Nevertheless, the best investment strategy is one that is regularly reviewed and updated. To help you achieve your financial goals, we’ve compiled a list of six great investment strategies.
What is an investment strategy?
The term “investment strategy” refers to the set of principles that guides your decision-making process when trying to achieve financial goals. Your investment strategy can be defined by your age, capital, tolerance for risk, and investment goals.
Broadly speaking, investment strategies can range from conservative to highly aggressive. The former would consist of a low-risk strategy with a greater focus on wealth protection, whilst the latter would involve a high-risk strategy focused on rapid growth through capital appreciation.
The importance of defining an investment strategy
Different objectives require different approaches. Therefore, it’s incredibly important to define your investment strategy before you get started. For example, it’s unlikely that a 30-year-old and a 60-year-old share the same goals or need the same strategies.
Make sure to create specific objectives that can be measured and analysed. An objective like:
“I want to retire by the age of 60” is too broad and subjective. Instead try to create specific objectives such as, “I hope to achieve a 9% average annual return on my investments over the next 15 years to retire early with a £300,000 portfolio.”
Once you’ve defined your objectives, you can start thinking about your strategy. Your investment strategy will serve as a blueprint to help reach your financial goals.
It will also help you get rid of any investments that are performing inadequately or aren’t contributing to the larger financial goal.
Six SMART investment strategies
We’ve chosen six SMART investment strategies that encourage financial growth whilst protecting your interests.
These strategies are designed for those who are starting out on their financial planning and wealth management journey. Regardless of age, these strategies will empower you to become financially free and fill your life with the things you love.
1. Investment risk
The behavioural model delves into your financial personality and aims to gain a better understanding of your attitudes, preferences, and tolerances. This is also called “risk appetite”.
Unlike a traditional Risk Profile Questionnaire, this model employs a sophisticated approach to determine risk tolerances. It amalgamates your attitudes and preferences into a single, proprietary Integrated Risk Factor Score.
This technique also places an emphasis on the, often ignored, link between risk tolerance and investment time horizon.
2. Portfolio construction
Your financial portfolio should be just as unique as you are. When you begin your portfolio construction, you should aim to create a bespoke collection of investments tailored to your needs. You can achieve this by blending two schools of thought:
- Modern Portfolio Theory: this systematic technique aims to build an investment portfolio that can be adjusted over time, ensuring all required objectives are met.
- Black-Litterman Model: when used in conjunction with the Modern Portfolio Theory, this technique produces a more stable and diversified portfolio by considering future expected returns as well.
Overall, portfolio construction is fruitful because it recognises that a balanced investment consists of 80% asset allocation and 20% investment choice.
Too many individuals focus solely on investment choice when asset allocation is the prime contributor to long term investing and financial success.
3. Risk vs. return
By creating unique value-based investment strategies, you can specifically target the level of return you need to achieve to realise your financial goals. One of the key features of any investment portfolio is the level of risk vs return.
Once you truly understand your financial goals, you can determine how much risk you can afford to take. This leads to more consistent returns and, simultaneously, lowers the chances of something going wrong.
4. Asset allocation and diversification
Asset allocation and diversification is a strategy that is hinged upon the balance between risk and reward.
Simply put, asset allocation uses the client’s financial goals, tolerance for risk, and investment horizon to create a diversified portfolio. It can divide assets across a number of categories, such as equities, fixed-income, and cash or equivalents.
Different asset classes have varying degrees of risk and return, which means they can perform unequally across the investment time horizon.
Ultimately, the proportional allocation of your different asset classes, such as stocks, bonds, and cash, can be more influential than your selection of individual investments.
For example, if you’re saving for retirement, and you’re decades away from reaching that golden milestone, you may be more inclined to invest a greater amount in riskier asset classes.
This is because you have more time to withstand the market’s short-term fluctuations. If you’re looking to purchase a new car in the next year, you may prefer to invest your money in a more conservative mix of assets.
5. Discretionary Investment Manager (DIM)
Discretionary investment management is a service that can only be offered by firms or individuals with extensive experience and specialist qualifications in the field. It’s a type of investment management in which buy and hold, or buy and sell, decisions are made by a portfolio manager on behalf of the client.
It’s a “discretionary” form of investment because financial decisions are made at the discretion of the investment manager. Therefore, it’s imperative that the client places their full trust in the portfolio manager’s expertise and capabilities.
6. Wrap-based investing
Wrap-based investing can allow clients to access DIMs, underlying investment funds, as well as tax wrappers like ISA accounts and pensions and bonds, all in an easily manageable, flexible, and low-cost way.
Other investment strategies tips
In addition to the above investment strategies, there are also some other tips and advice:
Be prepared for a bumpy ride
Let’s face it, there’s no such thing as reward without risk. No matter how big or small, aggressive or conservative, every investment carries a varying degree of risk, including keeping money in the bank, which is subject to inflation.
You need to be prepared for stock market crashes, unforeseen circumstances, and sometimes sharp declines. However, this is all a normal part of your investment journey and it’s important to remember that investment can go up and down. This leads us to our next tip, which is to never take on more risk than you are comfortable with.
Stay in your comfort zone
Staying in your comfort zone is imperative when investing. It would be foolish to stake more than you are willing to lose and there’s no point in losing sleep over your investments.
Good Financial Planners will take their time to get to know you, your needs, and your goals.
A bespoke and value-based investment strategy can help you reach your financial goals without sacrificing more than you are comfortable with or result in you paying too much tax.
Review and rebalance your portfolio
As times go on, the market will shift and so will your priorities. Therefore, it makes sense that you continuously review and rebalance your portfolio.
For example, at 25, your sole focus may be increasing capital gain. However, at 65 you may be more inclined to reduce any potential risks. Reviews can be carried out on an annual, quarterly, or even monthly basis.
What are the key benefits of a sound investment strategy?
- It will employ a sophisticated Behaviour Finance Analysis to truly understand your attitudes, preferences, and tolerances when it comes to investing.
- It will place an emphasis on creating bespoke portfolios rather than off the shelf solutions.
- It will strive to meet your financial goals within a risk parameter that you feel comfortable with.
- It will accommodate your needs with flexible, low cost and manageable platforms, such as Wrap-based investing.
What challenges may you come across?
As with most financial ventures, investing comes with potential challenges.
First and foremost, you could risk losing money. However, SMART investment strategies are those that maximise financial opportunities whilst reducing the possibility of risk.
Financial Planners can help you reduce the potential impact of monetary losses by creating a diversified portfolio and adopting a strategy that is suited to your unique needs.
Another drawback you could encounter is that your portfolio could no longer match your needs in 5, 10, or 15 years. Therefore, your Financial Planner should make a conscious effort to review and rebalance your portfolio on a regular basis. Understandably, your priorities may change and, consequently, so will your investment strategies.
Defining your investment approaches and strategies is essential because, without a clear investment plan, it will be difficult to maximise your returns and reach financial goals. However, you’ll also need a clear idea of your financial objectives.
Understandably, the risk of investing your finances can be daunting. However, if you hope to counter the effect of inflation and maximise your opportunities, a sound strategy that adapts with your needs can help you reach your financial goals.
The qualified advisors we work with will do everything they can to help you create a bespoke plan that fulfils your goals and leaves you feeling confident about your decisions.
We hope you found this guide useful, but should you have any questions or need some further advice, please feel free to contact us.