How to Pick a Strategy Based on the Amount You’ll Invest and Your Goals
Creating a wise investment requires careful planning and analysis. You have to know how much you are willing to invest and which type of investment is aligned with your goals. With a lot of options to explore, you need a definitive guide so you can make an informed decision.
Important Strategies that can help you Consider the Best Investment Option.
1. Know the purpose you want to pursue
When choosing your investment, you have to keep your main goal in mind. Whether it is safety, growth or income that motivates you to invest, you have to pick which of these characteristics you should prioritize. Are you planning to generate multiple streams of income for your retirement? Do you want to create a safety net or grow your money? Regardless of your reason for investing, your investment must reflect your goals.
2. Pick A Suitable Asset Class
When you talk about asset allocation, it means you divide your investments into a few types of investments. Each of them represents a certain percentage of the whole investment. For instance, you might be thinking of putting half of your money in bonds and the other half in stocks. For a more diverse portfolio, investing in commodities, forex, international stocks, and real estate investment trusts can also expand your investment beyond stocks and bonds.
With all of the options to consider, choosing the right allocation strategy that works for you might be too confusing. This is where understanding the risk involved comes in. You might want to stick to lower-risk investments like bonds if temporary losses bother you. However, if you are for long-term growth and you do not mind occasional setbacks, investing in stocks is ideal for you.
You should also remember that there is no such thing as an investment that provides sure-fire returns. Each of them whether long-term or short-term, entails risks. Even if you are the most cautious investor, you are still not spared from losses as they are part of investing.
3. Determine how much you are willing to set aside for investments
Before you formulate a solid investment plan, you should start by analyzing how much you want to set aside for investing. You will know the direction you should be taking by identifying your source of funds. Can you make monthly contributions or do you have a lump sum?
There are index mutual funds that do not require any minimum investment amount to open an account. You can consider these so you can set up an automatic plan for your investment where you can send funds from your checking account to your investment account. For this step, you can reduce market risk by considering investing every month. This strategy is referred to as dollar-cost-averaging.
If you prefer to invest a larger amount of money, there are also more options available to explore. Using multiple investments is recommended since it reduces the risk involved in investing.
4. Find out when you will need the money
Another thing you have to take into consideration is the timeframe. Safety is a primary concern because your future is at stake. You might want to make sure you are not losing money, especially if you are investing for retirement. If retirement is still years away, you should choose the type of investment that will maximize your money’s growth potential once you reach retirement age. In essence, you can see significant growth if you invest your money for at least five years in the market.
5. Know the level of investment risk you are willing to take
The risk of losing your money can be scary especially if you have spent years saving up for your future. Since there is no such thing as a no-risk investment, diversifying can minimize the risks. While you can still experience swings in the value of your investment, you can reduce the risk of seriously losing your money because of unfortunate circumstances or bad timing with this strategy.
If you are into high-yield investments, make sure that you do your research because high returns also mean high risks.
6. Create a clear investment structure
Setting risks aside will not help you make a wise investment because they are part of the process. There are also legal ramifications that you have to keep in mind and if you are not prepared for all of these, not only will you increase the risk involved but also end up not having a clear goal as to why you are investing. You will need to have an investment structure in place so you will know how to negotiate and find out which strategy to implement.
Your investment structure will serve as your compass so you will be in the right direction all throughout your investment journey. If you have investments that are performing poorly, you can always prevent things from taking a turn for the worse, because you already have a plan B. When creating a structure, be sure to keep what you seek to accomplish in mind.
7. Understand the different types of investment strategies
Your strategy should be aligned with your goals. Unless you know what these strategies are, you will not find any value in what you have invested in. Here are the five types of investment strategies:
- Income investing-This type of investment involves buying securities that provides investors returns on a fixed schedule. Bonds, real estate investment trusts, mutual funds and exchange-traded funds are all examples of income investing.
- Growth investing- With this strategy, investors are focused on capital appreciation by looking for companies that show signs of above-average growth through profits and revenues.
- Value investing-This strategy buys stocks that are much cheaper than their actual value. Searching for underpriced stocks requires a lot of research because you have to know the underlying companies’ fundamentals. You should also wait a few months for the stock’s price to increase.
- Socially responsible investing- With this strategy, you can stay competitive while building your portfolio in socially and environmentally friendly companies.
- Small cap investing- With this strategy, you only buy stocks from companies with smaller market capitalization.
The Bottom Line
It is also necessary to monitor the growth and value of your investment by knowing how to calculate the profitability index. This metric gives you an idea of whether or not you are making good investments. Being completely informed of the type of investments you will make and the risks involved will not only give you greater peace of mind but also maximize the benefits of investing.
