Welcome back to Money and Health with Chris! Today, we’re diving into a topic that might seem intimidating at first, but trust me, by the time you’re done reading, you’ll feel like a pro. We’re talking about how to develop an investment strategy. We’re going to break it down, keep it real, and maybe even have a little fun along the way.
So, let’s start with the basics. Developing an investment strategy isn’t just for Wall Street types in fancy suits. It’s for everyone—whether you’re just starting out in your career, saving for a big purchase, or planning for retirement. And the good news is, you don’t need a degree in finance to get this right. You just need a clear idea of where you want to go and a plan to get there. Think of it like planning a road trip. You wouldn’t just jump in the car and start driving, right? You’d want to know your destination, the best route, and maybe even where the good roadside diners are along the way. Your investment strategy is kind of like that roadmap—it helps guide you toward your financial goals.
Let’s start by talking about those goals. What are you saving for? Maybe you want to buy a house in the next few years. Or perhaps you’re thinking long-term, like building up a nest egg for retirement. Whatever your goals are, they’re going to shape how you invest. If you’re saving for something in the near future, you might want to be more conservative with your investments to avoid any big losses right before you need the money. On the other hand, if you’re investing for something way down the road, like retirement, you can afford to take a bit more risk because you have time to ride out the ups and downs of the market.
Now, speaking of risk, this is where you need to get real with yourself. How much risk are you comfortable with? I know, I know—nobody likes to think about losing money. But the truth is, investing involves some level of risk, and it’s important to know how much you can handle. Some people are cool with taking big risks for the chance at big rewards. They’re the ones who don’t mind the roller coaster ride of the stock market. Others, though, would rather play it safe and keep things steady. And that’s totally okay. The key is to be honest with yourself about how much risk you’re comfortable with, because that’s going to influence the types of investments you choose.
For example, let’s say you’re someone who gets anxious every time the stock market drops a few points. If that’s the case, you might want to lean more toward bonds, which are generally safer but offer lower returns. On the other hand, if you’re the type who sees a market dip as a buying opportunity, stocks might be more your style. The important thing is to find a balance that lets you sleep at night while still working toward your financial goals.
Once you’ve got a handle on your goals and risk tolerance, it’s time to think about diversification. In simple terms, diversification is all about spreading your investments across different types of assets—like stocks, bonds, and real estate—so that if one investment doesn’t do well, the others can help cushion the blow. It’s kind of like not putting all your eggs in one basket. For instance, imagine you’ve invested all your money in one company’s stock. If that company hits a rough patch, your entire investment could take a hit. But if you’ve spread your money across several companies, or even different industries, you’re not as vulnerable to any single one’s performance.
This brings us to the next step: choosing your investments. This part can feel overwhelming because there are so many options out there. But don’t worry—we’re going to keep it simple. You’ve got your basic building blocks: stocks, bonds, and real estate. Stocks are shares of ownership in a company. When you buy a stock, you’re buying a little piece of that company and betting that it will do well in the future. Stocks can offer great returns, but they’re also more volatile, meaning their prices can go up and down a lot. Bonds, on the other hand, are more like IOUs. When you buy a bond, you’re lending your money to a company or government, and they pay you back with interest. Bonds are generally safer than stocks, but they also offer lower returns.
And then there’s real estate. This can be anything from buying a rental property to investing in a Real Estate Investment Trust (REIT). Real estate can be a great way to diversify your portfolio and generate income, but it also comes with its own set of risks and responsibilities. For example, if you buy a rental property, you’ll need to manage tenants and maintenance. On the other hand, investing in a REIT lets you get exposure to real estate without the hassle of being a landlord.
So, how do you put all these pieces together into a portfolio? It’s all about balance. You want a mix of investments that aligns with your goals and risk tolerance. For example, a common approach is the 60/40 rule, where 60% of your portfolio is in stocks (for growth) and 40% is in bonds (for stability). This is a nice, balanced approach for someone with a moderate risk tolerance. But you can adjust these percentages based on your own situation. If you’re more conservative, you might go 50/50. If you’re more aggressive, maybe 70/30.
And remember, your portfolio isn’t set in stone. As your life changes, your investment strategy might need to change too. For instance, as you get closer to retirement, you might want to shift more of your money into safer investments like bonds. Or if you reach a major financial milestone, like paying off your mortgage, you might decide to take on a bit more risk in your portfolio.
Now, once you’ve built your portfolio, the next step is to stay consistent with your investing. This is where a strategy called dollar-cost averaging comes into play. It sounds complicated, but it’s really just about investing a fixed amount of money at regular intervals, no matter what the market is doing. The idea is that by investing regularly, you’ll buy more shares when prices are low and fewer shares when prices are high, which can help smooth out the impact of market volatility on your portfolio.
For example, let’s say you invest $200 a month into a mutual fund. Some months, the market might be up, and you’ll get fewer shares for your $200. Other months, the market might be down, and you’ll get more shares for your money. Over time, this approach can help you avoid the temptation to try to time the market which is something even experts find very difficult to do.
But investing isn’t a set-it-and-forget-it kind of thing. It’s important to regularly review your portfolio to make sure it’s still aligned with your goals and risk tolerance. This is where rebalancing comes in. Over time, some of your investments might grow faster than others, which can throw your portfolio out of balance.
For instance, let’s say your original plan was to have 60% of your portfolio in stocks and 40% in bonds. But after a few years, your stocks have done really well, and now they make up 70% of your portfolio. That might sound great, but it also means you’re taking on more risk than you originally planned. Rebalancing involves selling some of your stocks and buying more bonds to get your portfolio back to its original allocation. You should check if you need to rebalance your portfolio every six months to a year.
Another thing to keep an eye on is fees. Even small fees can add up over time and eat away at your investment returns, so it’s important to know what you’re paying. This includes things like expense ratios for mutual funds and ETFs, trading fees, and account management fees. For example, if you’re investing in mutual funds, look for options with low expense ratios. And if you’re working with a financial advisor, make sure you understand how they’re compensated and what fees you’re being charged. A little bit of research can save you a lot of money in the long run.
Finally, it’s important to stay informed and be ready to adapt your strategy as needed. The world of investing is always changing, and while you don’t need to become a finance guru, it’s good to keep up with the basics. One way to stay informed is by subscribing to financial newsletters, following market trends, and reading up on new investment products. Just remember to take everything with a grain of salt—everyone has an opinion, and it’s important to do your own research before making any big changes to your strategy.
Developing an investment strategy may seem like a lot to take in at first, but remember, investing is a journey, not a sprint. There will be ups and downs along the way, but with a solid strategy, consistency, and a little patience, you’ll be well on your way to reaching your financial goals.