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Investment strategy basics: A guide to building wealth
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Key takeaways
Mastering the basics of investment strategies is essential to achieving your financial goals.
We examine why a plan is crucial and how you can tailor it to fit your risk tolerance.
Learn about popular approaches from core-satellite strategies to index funds and bonds.
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.
Case study: Core-satellite approach
A way to invest in index funds is through a core-satellite strategy, which combines broad, diversified, low-cost investments with ones that have higher risk and reward potential. The approach is diversified and reduces overall portfolio risk by spreading investments across various assets. It balances stability and growth potential.
A core portfolio could consist of an ETF that tracks a diversified group of global companies like the FTSE All-World Index, which provides exposure across 56 developed and emerging market countries. This index consists of over 4,000 large and mid-cap companies and covers 87% of the world's investable market by capitalisation.1
A satellite investment could be in the Nasdaq-100 Index. This index provides exposure to the 100 largest non-financial companies listed on the Nasdaq Stock Exchange, and it has long been associated with innovation. It features companies at the forefront of disruptive technologies, revolutionary giants, and well-known brands across various sectors.
As it is concentrated in high-valuation growth stocks and technology companies, it is considered potentially a riskier investment. Another satellite option that would reduce this risk is an equal-weight version of the Nasdaq-100 Index, which allocates the same weight to each stock so concentration risk can be reduced.2
Common mistakes to avoid
But investing is not without risks. There are common mistakes to avoid.
They include chasing trends or hot stocks, ignoring your risk tolerance, not diversifying your portfolio, reacting emotionally to market volatility, and neglecting to review and adjust your strategy over time.
Navigate markets with confidence
An investment strategy is your personalized blueprint for financial success. By setting clear goals, understanding your risk tolerance, and staying disciplined, you could navigate the markets with confidence.
Explore our offerings
Want to learn more? Check out our other investment strategy articles. Find out the basics of ETFs, dive deeper into more advanced approaches, or understand the principles of investing in funds.
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