What is an Investment Strategy?
Article by Jonathan Weimers
The first time you sat with a financial adviser s/he would have probably asked you “What is your investment strategy?” followed by some witty waffling on your part then the adviser smiling and trying to sell you some financial products.
You thought this was quite spiffy but really you were just hoping you don't have to read all the papers you were given.
But were the financial products you took really what you needed?
Are you recouping notable value from those investments or are you pretty much just getting the money back in a lump sum that you were giving over the past couple years? In order for us to get a good handle on that, we do need to ask ourselves that same question a financial adviser would ask: “What is my investment strategy?”.
But what does that actually mean?
Investment Strategy
I’m going to keep it simple. Investment strategy has 3 aspects:
- What do you want to make more money for?
- How prepared are you to potentially lose some money? (Risk Appetite)
- What is your context?
(1) What do you need the money for? Do you want to make money to buy a new car? A house? Your child’s university fund? Or simply to save and grow your wealth? What is the purpose of the investment?
This is important because it automatically gives you a timeline of when you would need that money and what are the amounts of money you would need to work with.
A clear purpose also helps you come up with how risky you should consider going (if you lose the money, how hard does it impact your life?) and it starts to give you an indication of what kinds of investments will be a good fit for the kind of return you are looking for.
Clearly identifying a purpose for your investment allows you to be disciplined with it too.
(2) How prepared are you to potentially lose some money? (Risk Appetite) This is a critical component to your investment strategy and will immediately exclude certain types of investments and actions completely from what you reasonably should and should not do.
To help you understand risk, here’s a very basic way to think about it. A higher risk profile usually means there is a greater chance to earn more money, but also a higher chance you may lose the money you invested instead.
A lower risk investment will be safer with a decreased chance to make a loss but the gains you will make will be a lot lower than a risky investment. A good example of this is whether you choose to invest in shares (high risk) which are subject to the myriad of market-affecting forces or invest in a fixed term savings account (low risk) which is stable but you won't be making much money.
(3) What is your context? Your situation is really important when deciding how to invest, or even if you should be investing and not using your money elsewhere. For example, if you are struggling to pay off your car or home, you shouldn't be considering anything high risk such as shares, forex or cryptocurrency but may consider something super low risk that you can make small monthly contributions to over a longer period of time to slowly save and grow your money such as a money market fund or a fixed-term savings account. Going this route however may make you substantially less money than a risky option but if you cannot afford to lose it, don't go risky. Full stop.
If however your budgeting is rock solid and you are firmly in command of your financial situation with a lot of extra money to spend then you can definitely consider higher risk options and the potential for better returns. Also keep in mind your income and what kinds of investments work for what you have.
So where to from here? Try out building some investment strategies of your own. I find it immensely fun to plan out investment strategies for different things I need in life or goals I have. The benefit is it gives me a clear plan of action to get investing and tangible next steps.
If you’re feeling uncomfortable, always consult your financial adviser and use the info from these articles to better inform your discussions so you get the most out. Otherwise, thinking about these things yourself will get you better equipped to understand the market and ways to empower yourself.
Disclaimer: I am not a registered financial services provider. The views expressed in this article are in no way the views of my employer or affiliated in any way.
