3 Key Elements to Building a Proper Investment Strategy


investment

Financially navigating the current economy’s murky waters is no easy feat – not even for seasoned business people who have some experience with investment strategies. Beginner entrepreneurs have quite a hard time coining an investments’ portfolio and action plan, especially when they lack the proper basics of how to approach them for the long term.

Many people think that investments are all about risk mitigation, but there are several other factors besides risks to consider when you build a proper investment strategy. Today we will take a look at three key elements that you need to focus on if you want to benefit from your investments and create a solid portfolio.

1. Appropriate Asset Allocation

Before you build your investment strategy and your future portfolio, the first things you should ascertain are your individual features and personal financial path. Before designing a strategy, you need to factor in your age, the time you are willing to spend to nurture your investments, the amount of capital you are willing to invest, the future capital needs you will have to cover in your business plan and your risk tolerance.

After you are clear and decided on all these factors, the first key element of your investment strategy is the appropriate asset allocation – and by appropriate we mean appropriate for you. In other words, having all the above prerequisites, you need to decide what asset classes you are going to invest into. The three major asset classes are:

  • Equities/stocks
  • Fixed income/bonds
  • Cash equivalents/money market instruments

Specialists in the field also consider commodities and real estate when talking about asset classes, but you can break down each major class in its smaller subclasses and categories. In other words, the first key step is to understand well what is binary trading, what are the risks of real estate investments, and what risk margins are you going to tolerate when it comes to devoting larger chunks of money to equities instead of bonds.

Once you have things clear and choose the asset classes that are most appealing to you (from a risk/return tradeoff point of view), you need to decide if you are going to be a conservative investor or an aggressive one. A conservative portfolio will show up to 75% of investments placed into fixed income securities, leaving the other 25% to be split to equities and cash equivalents. A more aggressive portfolio consists of 50-55% investments in equities, followed by a 35-40% of fixed income investments and leaving a 5-10% margin for cash.

The main goal of a conservative portfolio is to protect the investments’ value. Such an allocation would provide you with current income from bonds and long-term capital growth potential coming from equities (if they are high-quality) and cash. A more aggressive portfolio (moderately aggressive to be exact) is suitable to those willing to take more chances and thriving to achieve a balance between income and capital growth.

2. Appropriate Financial Allocation to the Chosen Assets

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Up and down of investment

 

Picking the right assets is just the tip of the iceberg. One of the most important steps in any investment strategy is allocating financial resources for each and every asset class. While it doesn’t seem hard at all at first, as stocks are stocks and bonds are bonds, the way you pick each stock and each bond can make a tremendous difference and impact on your investment strategy and portfolio.

  • Picking stocks: you need to consider the risk factor and decide what money to invest in what equity depending on the sector, market cap, stock type, price changes, and industry trends and so on.
  • Picking bonds: if you decided on bonds, you need to assess its type and rating, the coupon, the bond maturity, and the general interest rates trends and environment.
  • Picking mutual funds: there are tens of things to consider before you decide on working with mutual funds and the first one is to learn how exactly these funds work. Be aware of the governmental Investor Alert instruments and make a very well educated decision.
  • Picking exchange – traded funds: you can consider them mutual funds that can be traded like They are passively managed, in comparison to mutual funds, and offer wider diversification opportunities together with cost savings.

You now have picked the asset classes you want to invest in feeling comfortable and decided how much money you want to push in each asset type to make an income and grow your capital while relying on a diversified and rounded portfolio.

3. Appropriate Reassessing and Rebalancing the Strategy

If you think you can now sit back, enjoy and relax while money pours in your bank account from all your investment sources, you can’t be further from the truth. This is perhaps the most difficult part – or at least the one that will require most of your time and your attention.

The market changes every single day, and you need to keep up with it. Your initial predictions and weightings may suffer modifications as the market changes, and you have to reassess your investments. Do this by categorizing the investments from a quantitative point of view and by determining their value proportions to the whole. In other words, you might find that you have too many eggs in the equities basket and you should move them to the bonds basket, at least for a while.

Reassessing and rebalancing have a lot to do with your risk tolerance, your current financial situation, your current and future needs, the business plan, and the industry shifts. You also need to consider tax implications, analysts’ reports, and market research to understand which investments are burdens and which ones should be further funded.

incremental growth

One of the mandatory elements of your investment strategy is diversification. No matter if you chose a conservative approach or a more aggressive one, you diversified enough to ensure your strategy a healthy dose of flexibility. Don’t forget about the same diversification when you rebalance your portfolio and reassess the strategy.

Mutual funds and exchange – traded funds allow you to achieve high levels of diversification, permitting you to obtain economies of scale, which otherwise would be hard to achieve on your own with small amounts of money. However, even such investment vehicles need to be reevaluated regularly and tweaked, while you steer clear from some major diversification mistakes you should be aware of.

While diversification is the safest bet one can make when conveying an investment strategy, the most important thing you need to do way before thinking about investing is to have your homework perfectly executed. Every day we face the risk of large and sudden declines, massive economical structural changes, political changes and global economy trends that affect every business decision we make. Pay attention, do your research and have investment analysts help you find your way through the jungle.

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