What is an Investment Strategy?
An investment strategy is critical towards building a successful portfolio. The whole reason why you invest is to make money. You need to be a smart investor, have the right knowledge, know what you’re doing, have a plan, and be ready to make the right choices.
Your investment strategy is your plan for success. It is the big picture of what you’re going to do. You need to strategize when you choose investments or else you will be risking bad choices and bad investments.
Why do you Need an Investment Strategy?
An investment strategy is critical for success. Those who make wild guesses are merely gambling and will be lucky to make a low return. You’re objective should be to maximize your earnings. You can’t do that without an investment strategy.
You need an investment strategy in place in order to keep track of your investments as well. Why did you buy those bonds? Why did you make that trade? Why should you choose this stock over that one? When you ask yourself these questions, a good strategy should help you answer them.
How do you Build an Investment Strategy?
When it comes to actually building your investment strategy, it will take some time, effort, learning, and planning. Follow these steps to build your own investment strategy:
Step 1: Decide on your Investments
Before you buy anything, decide what you want to put your money into. Don’t simply say, “I want the best investments.” Be specific. Are you going to buy stocks, bonds, mutual funds, real estate, commodities, etc.? Are you going to invest in one type of security or multiple ones?
The more you invest in, the more time and effort you’ll need to put into it. Keep this in mind when you are choosing a larger variety. Don’t spread yourself too thin or else you will make less money. Investing in a larger variety of securities, companies, etc. will not make you more money. You need to be diversified, but you need to be smart about it, too.
Step 2: Gain a Strong Knowledge of What you are Going to Do
Now that you know what securities you will put your money in, gain as much knowledge as you can about it. Get books, courses, look online, etc. and learn everything you can about what you’re planning to do.
If you are absolutely brand new to this, start with the basics. Even if it takes a few more months before you get started, it will be worth it. It’s better to wait a couple of months and break even or make a return than it is to get started right away and lose a lot of money. If you are worried about gaining experience, work with a free stock market simulation game until you are ready to invest real money. You can find further information on this type of game and get started at the link below.
If you find the information overwhelming, stick with studying one security. For example, stick with learning about stocks and plan to invest in 6 to 10 stocks first. Once you have the whole process mastered and you feel confident about your investment strategy, you can move onto other investment types if you so desire.
Step 3: Device a Research Strategy
Now you are getting into the investment strategy. Design a research strategy. Research is incredibly important for all types of investing. You need to know exactly what you are putting your money into and you need to know that it is a good buy.
When you study, you will also study about research. Once you know how to do it, you can make a strategy. Decide what kind of ratios, financial statement, and other information you will look for. Figure out how each stock, bond, or other investment will need to measure up before purchasing.
Step 4: Determine the Dollar Amount to Invest
Basically, the dollar amount you will invest will depend largely on what you can invest. Obviously, you can’t invest $10,000 a month if you are barely making $3,000 before taxes. Determine the exact dollar amount or the percentage of your income you will invest.
Try to give yourself a goal. Push yourself to invest more and more. If you think you can afford $100 a month, start with that and try to do $200 next month. The more you invest, the more you’ll make. Even a poor investment strategy will do well if you invest a lot.
Step 5: Build your Portfolio
Now it’s time to spend some money, but not in the way that will make you broke. Start buying securities and building your portfolio. After you’ve researched, you will know exactly what do buy. Buy as much of those securities as possible.
Build a strong portfolio. When you are researching, keep diversification in mind to minimize your risk and maximize your gains. Buy companies that show promise for growth or value increase in the future based on your research.
Step 6: Monitor your Portfolio
The beginning of your investment strategy is hardly the end. You will need to continue to monitor your portfolio and make changes as you go. Spend at least 1 hour per week per investment. For example, if you bought stock in 5 different companies, you should spend at least 5 hours per week researching that company.
As necessary, you will be buying and selling stock, or other securities. If you grow unsure about a corporation or you feel you’ve made the most on an investment you can, move on. Don’t lose money.
Most of all, continue studying and practicing your craft. Read all the books you can and take the information in slowly but steadily. Don’t automatically take all information you read or hear as perfect. Use it to help you along with your investment strategy.