Whether you’re just starting out or refining your approach, mastering the basics of investment strategies is key to building wealth.
This article delves deeper into popular approaches from index funds that are designed to mirror the performance of benchmarks like the FTSE All-World Index to stocks and bonds. We examine why a plan is crucial and how you can tailor it to fit your investment style, whether you’re a cautious investor or someone who loves a bit of risk.
Read on for our case study in core-satellite investing. This approach blends a core portfolio of low-cost index funds, with the potential of satellite investments in higher-risk, higher-reward opportunities.
What is an investment strategy?
An investment strategy is a set of principles and plans designed to help you allocate your resources to achieve specific financial objectives. It involves balancing risk and reward, time horizons, and personal preferences.
Why you need a strategy
You need a strategy as it provides clarity and consistency. If financial goals are clearly defined, you can establish a well-thought-out roadmap for decision-making.
Putting a plan in place reduces the potential for emotional decisions during market fluctuations. It improves risk management.
A strategy sets up the building blocks for portfolio optimisation and can potentially help you to maximise your returns based on your situation.
Key components of an investment strategy
To build an investment strategy, first, you need to set goals and establish how long you want to invest. Short-term, medium-term, and long-term investment objectives will be made according to your time horizon.
As investments can fluctuate, it’s important to know your risk tolerance and understand what risks you’re comfortable taking.
Once this tolerance is established, you can then decide on your asset allocation. In other words, how to distribute your investments across stocks, bonds, real estate, and other assets.
By diversifying your investments across different asset types and sectors, you can reduce risk in your portfolio.
Popular investment approaches
There are many investment approaches to consider. It’s important to be aware that an index, stock, or bond can go down as well as up, and past performance is not necessarily an indicator of future performance. Our examples are for information purposes only and are not financial advice. There are many options to choose from when considering an investment strategy.
One such tactic is index investing. Instead of investing in individual stocks, you invest in a broad range of companies through a financial product that tracks the performance of an index. It may offer simplicity and diversification.
Another approach could be growth or value investing. Growth investing targets companies that have the potential to perform above the market average. Value investing focuses on investing in underpriced stocks that may perform in the long run when the market recognises their worth.
If you’re interested in investments that provide a regular income stream, like dividend payments or interest from bonds, then income investing could be for you.