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3 Simple Steps to Create Your Investment Strategy

Your investment strategy does not have to be complex


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Tealfeed Guest Blog

3 years ago | 6 min read

You have done your research. You have looked at fundamental and technical indicators. You kind of understand the direction you want to go when it comes to investing, but you do not have a solid strategy you can execute. A strategy is a plan created to achieve a major aim. When it comes to investing, it is necessary to have a strategy.

Having a strategy will allow you to avoid making certain mistakes. In this article the securities, tradeable assets, we will be focusing on are ETFs and stocks. The 3 simple steps for creating your investment strategy are to establish your focus, establish your goal, and establish your portfolio risk and optimization. With these steps, your path to long-term financial success will become much clearer.

1. Establish Your Focus

When it comes to investing, your focus can come down to value, growth, and/or momentum. Value investing involves picking securities that appear to be trading less than their intrinsic or book value. This means picking companies that are currently being underestimated and investing in them for the long-run.

Fundamental analysis is key in value investing. An example of a value ETF is the Vanguard Value ETF. Examples of value stocks are Exxon Mobil and JPMorgan Chase.

Growth investing involves picking securities to significantly increase one’s capital, which boils down to picking securities that are expected to provide returns at an above-average rate compared to the overall market. Fundamental analysis is also key in growth investing, and technical analysis is also useful. An example of a growth ETF is the Vanguard Growth ETF. Examples of growth stocks are Amazon and Shopify.

Momentum investing involves picking securities to capitalize on continuing market trends. This means picking securities that show potential for upward trends in their prices. This is where technical analysis is key. An example of a momentum ETF is the iShares Edge MSCI USA Momentum Factor ETF. Examples of momentum stocks are Skechers and Syneos Health.

In addition to these three focuses, there is also a focus known as dollar-cost averaging. This essentially involves making regular investments into the market without considering any fundamental or technical analysis. Automating your investing and opting for either mutual funds or a Robo-advisor that automatically invests in specific ETFs and/or stocks for you are important to understand because they may be the best for you if you would like a more hands-off approach to investing.

The importance of understanding these focuses is to become more understanding of what is the best way for you to allocate your portfolio regarding the ETFs and stocks you invest in. I am more on the growth side.

My largest holdings are in Microsoft, Apple, and Facebook. All of the technology shares that I own will give me returns greater than the return of the overall market over the next 2 to 3 years. I know the focus I want for my portfolio. I want to be aggressive when it comes to capital appreciation, but without a goal this focus is useless.

2. Establish Your Goal

If you have not read my article on the 4 Steps to Take to Act on Your Goals, please do. I go into detail regarding the 4 steps to take so that you can bring your goal to fruition. First, write down your investment goal so that you can realize it is real. Next, use the SMART Goal method to make your investment goal specific, measurable, achievable, relevant, and time-bound.

Then, tell someone you trust about your investment goal to keep yourself accountable. Finally, execute on your goal. Once you have decided on your primary focus, establishing your goal is important so that you enforce in your mind that you need to act.

My investment goal is to primarily purchase growth-focused stocks that will garner me above-average returns over the next 2 to 3 years. I made sure to write that down. From there I made it specific and measurable by stating that I will invest in technology companies such as Apple and Facebook and that I will reinvest in them quarterly based on fundamental and technical indicators.

I made it achievable and relevant by stating that I will invest a minimum of $1,000 per month, about 20% of my monthly income, and by also stating that I am setting myself up for long-term financial success through investing in strong growth companies. My investment goal is time-bound due to me working on it monthly. I told one of my friends from college to keep myself accountable. I execute my goal by staying consistent.

3. Establish Your Portfolio Risk and Optimization

Portfolio risk is the chance of your investment goal failing to result in any capital appreciation. Beta is an important measure to understand regarding the risk of your portfolio as a whole and the risk of each security you are invested in on an individual basis. A portfolio or security with a beta below 1 is less volatile compared to the market than a portfolio or security with a beta above 1, which is more volatile compared to the market.

My current portfolio has a beta greater than 1 due to it being allocated more to growth-based companies such as Microsoft, Apple, and Facebook. To help balance the risk of experiencing potentially significant losses, I am also invested in more value-based companies such as AT&T and Nike.

Greater levels of diversification than what I have at the moment would reduce the risk of me facing significant losses, but I am comfortable with the level of risk I am taking in my current portfolio.

The risk you are willing to take to get returns comes down to the tolerance you have.

Portfolio optimization involves picking the best distribution of securities in your portfolio. In a perfect world, a balanced portfolio also involves investing in bonds and allocations such as 60% stocks and 40% bonds or 70% stocks and 30% bonds. I like to attribute my portfolio optimization to my allocation of ETFs and stocks. For example, my current portfolio is 30% ETFs and 70% stocks.

This is the optimal portfolio for me because I am confident in the stocks I am invested in through the due diligence and research I have conducted, and I am confident in the ETFs I am invested in, which are the Vanguard S&P 500 ETF and the Vanguard Information Technology ETF, due to both tracking major indices that are benchmarks.

Portfolio rebalancing is an important aspect of portfolio optimization. Over time, the allocation you have created for your portfolio changes due to increases or decreases in the values of the securities you hold. To rebalance your portfolio, you must buy more of a specific security or sell more of a specific security.

For example, if my portfolio allocation shifts to being 20% ETFs and 80% stocks due to significant capital appreciation in the technology companies I am invested in, I would sell a few shares of them and then repurchase shares of the ETFs so that I can get back to being 30% ETFs and 70% stocks. Rebalancing allows you to re-allocate to the level of risk you are okay with taking.

Your investment strategy is what will guide your decision making as you grow on your financial journey. Should you limit yourself to one investment strategy? When you are just starting, you should focus on one investment strategy. Once you have felt like you have mastered that strategy and are prepared to move onto a new strategy, you should do so.

The big picture here is that your investment strategy does not have to be complex if you do not want it to complex. As you have read throughout this article, my investment strategy is rather simple. It works for me because I prefer to keep it simple.

I do not like to overcomplicate things in life and my investment strategy is one of the important things I wish to not overcomplicate. Investing can be daunting, but once you develop the best investment strategy for yourself, you will be thanking yourself in the long-run.

This article was originally published by Tunji Onigbanjo on medium.

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