Building your own investment strategy
How to create your own strategy
The world of finance can be intimidating for most beginners. For this reason, some new investors opt to buy into fully managed portfolios where an expert makes all the decisions on their behalf.
Did you know?
If you wanted to buy shares in the past, you would’ve needed to do so through a physical stock exchange. However, not just anyone could interact with the market the way you can today.
Traditional stock markets had strict rules for participants, and ordinary people had to buy and sell shares through a stockbroker who was a formal member of the exchange.
The good news is that anyone can participate in the markets today, and you can build and manage your own portfolio if you have a good strategy in place. You might make a few mistakes when you start out, but you’ll improve as you gain more investment experience.
In this lesson, we’ll outline a basic four-step process to help guide your thinking when you create your strategy.
Step 1: start with the end in mind
Outside of the obvious reason of wanting to grow their wealth, investors put their money into the markets with different goals in mind. For instance, you may feel that you want to retire with more money than your existing pension fund will offer you at maturity. Maybe you want to save enough money to buy a beach house when you retire.
Whatever your reasons may be, knowing why you want to invest your money and for how long will help you figure out what kind of investments to add to your portfolio.
When you formulate your goals, it’s better to stretch out your timeline. For instance, if you want to raise funds for your wedding in three years’ time, you may want to extend this goal to five or more years to improve your chances of reaching your desired amount.
However, note that for short-to-medium-term goals such as this one, it may be better to put your money into savings accounts or bonds. To truly benefit from investing, giving your portfolio ten years or more to compound could be helpful.
This is because many factors can affect the value of your investments. There’s no predicting how your final return will look and you might not reach your goal within your desired timeframe.
Step 2: write it down
To start your strategy, commit to writing it down. Over your investment’s lifetime, you’ll need to keep record of all your interactions with your portfolio. This can be anything from the day you bought an asset and for how much, to the reason you sold a certain asset.
Homework
Think about some of the reasons you want to grow your money and write them down on a Word document, in your email drafts or on a piece of paper you can keep safe. You’ll use these when you formalise your strategy.
Having a record will help you keep track of what impact your decisions have had on your portfolio as well as pave the way for future investments and tax decisions. You can choose to organise your portfolio in a complex Excel sheet or simply write it down on a document you can easily access when needed.
Step 3: how will you finance your investment?
You need money to build your portfolio, so your strategy needs to outline where you’ll get your capital. For instance, you may have a savings account you’ve been building up for a few years that you’d be comfortable tapping into for a lump-sum deposit.
You might also need to continually fund your portfolio if you want to keep adding more assets to it. Adding more money to your portfolio regularly could improve your chances of reaching your goal sooner.
You can also smooth your returns by ‘dollar-cost averaging’. This involves saving and investing into your portfolio on a regular basis. It could reduce the overall average price you pay for your investments because you can buy more holdings at a lower price when markets have fallen. Doing this could potentially improve your long-term profits.
For instance, if your portfolio invests in XYZ ltd, placing a once-off lump sum into it means you’re buying all your shares at its current price. If you funded your portfolio at intervals instead, the market could fall, giving you the opportunity to increase your holdings for less and reap the benefits of its potential rise in value over time. Note, however, that you could also end up paying more for your additional holdings if the market rises.
As with your goals, you should write down all the contributions you make towards your portfolio. This way, you can clearly see if it’s making a profit or if you’re losing money during any given period.
Step 4: what are your annual profit expectations?
Unlike a savings account, where your cash can only grow by the interest rate you receive, an investments portfolio can grow through the increasing value of your shares or bond. You can also reinvest your dividends or coupon payments to further accelerate growth.
Your goal is to work out how much your capital will need to grow by each year to reach the investment goals you set. You can use some of the free compound interest calculators available online to see examples of the potential outcomes of an investment based on factors like your desired risk level, target amount and timeframe.
Once you know your desired outcome, you’re better equipped to decide what you should be investing in. It’s harder to reach a precise profit target, so you should think about an achievable range instead.
Lesson summary
- Building your own investment strategy requires research and critical thinking
- Your goal and timeframe are key factors in determining how you should invest your money
- Write down your strategy to accurately measure how well it’s working or where it’s failing
- Consider how you’ll fund your portfolio to reach your goal in the timeframe you set
- You can use online calculators to project what your returns could be at your goal date
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