Whether you believe it or not, you probably already have an investment strategy. When we talk to people about their investments, they often say things like “most of my money goes into my 401k, but I keep some to trade on the market.” Meaning they’ve already decided to allocate a certain amount to trading individual stocks - and those stocks generally indicate some strategy as well.
Regardless, managing your investments and having a strategy is a key component of wealth management. Proper investment management can help you to grow your wealth over time, retire comfortably and achieve other financial goals.
In general, your investment strategy should help you do three things:
Grow your wealth. Your investments are likely to appreciate in value over time. Whether this is a stock or bond, or real estate investment, the value of most investments trend upwards in the long run.
Generate additional income. Whether it’s interest on savings, divdidends on stock, or perhaps a revenue generating property, your investment strategy can help you generate more money! This is important—especially in retirement—when you may no longer have a regular paycheck.
Manage your risk. As part of your investment strategy, you can diversify your investments across different asset classes and sectors. This can help to reduce your overall risk and protect your capital.
As you start to think more intentionally about your investing strategy, there are several factors to consider.
Your financial goals. What are they? Are you saving for retirement? A down payment on a house? How much will these things cost? Before you can develop an investment plan, you need to identify the goals the plan is meant to help you reach.
Your timeline. How long do you have to reach your goals? The amount of time you have to put your money to work can shape the way that you invest. If you have a long time horizon, you can afford to take on more risk with your investments. But if you have a short time horizon, you may need to be more conservative with your investments.
Your risk tolerance. How much risk are you comfortable taking with your investments? Some people are more risk-averse than others. The amount of time you have can also impact your risk tolerance—if you have a long timeline, you can potentially take on more risk, as there is time to make up for any losses.
Your asset allocation. Asset allocation is how you divide your investments across types of investments—stocks, bonds, real estate, and cash. Having a diverse allocation of assets can help to reduce your overall risk and protect your capital. It’s also kind of fun.
They way you manage your assets and investments is also part of your plan. Depending on how engaged you are and your knowledge of the market or different financial tools, you might approach your strategy differently.
Active management. Active management means that you are selecting and managing investments in an attempt to outperform the market. This strategy is likely for people with a high level of knowledge about investing and the markets.
Passive management. Passive management is more common among most of our Members. This has them investing in index funds or ETFs in an attempt to track the performance of the market. As the market has traditionally always gone up and to the right, this is a lower-risk way to invest and feel fairly confident that your capital will continue to grow.
Combo. Most people fall somewhere in between. Virtually all of our members have at least some portion of their assets in passive management situations. This accounts for most 401k, IRA and retirement focused accounts. We also see many of our Members trading individual stocks with a smaller % of their money.
Other considerations around your investment strategy reflect personal choices and beliefs. Are you passionate about green enegry? Then you might look for stocks of companies or funds that are centered on creating renewable energy sources. As you build your strategy, there are numerous invement opportunities to familiarize yourself with.
Stocks. Stocks are shares of ownership in a company. When you buy a stock, you are essentially buying a piece of the company. Stocks can be volatile, meaning that their prices can go up and down dramatically. However, stocks also have the potential to generate high returns over the long term.
Mutual funds. Mutual funds are baskets of securities that are managed by a professional investment manager. Mutual funds offer a way to diversify your investment portfolio and reduce your risk.
Exchange-traded funds (ETFs). ETFs are similar to mutual funds, but they are traded on an exchange like a stock. This makes ETFs more liquid than mutual funds, meaning that you can buy and sell them more easily.
Bonds. When you purchase a bond, you are essentially making a “loan” to the government or a corporation. In return for that “loan,” you receive your principal amount plus interest back. They’re considered less risky than stocks—but also generally generate lower returns.
Anything outside of the above 👆 would be considered an “alternative investment.” Opportunities that fall into this class could include:
Real estate. Real estate can be a good investment for people who are looking for a stable source of income and appreciation. However, real estate can also be illiquid, and expensive or burdensome to manage.
Private equity or venture capital. Investments in private companies that are not publicly traded or investments in early-stage companies with high growth potential. Both of these can be hard to evaluate and often require you to be an accredited investor - which means you have a net worth of over $1M or make over $200k/year ($300k for married couples).
Cryptocurrencies. Cryptocurrencies are digital or virtual tokens that use cryptography to secure their transactions and to control the creation of new units. Cryptocurrencies are highly volatile and speculative, but they also have the potential to generate high returns.
Yes, it does. It can be a little overwhelming and complex as you introduce new goals (often on different timelines), and different types of investments. This is why as people begin to accumulate wealth they often begin working with a financial advisor, which is smart—but can also be expensive.
Before you make that decision, be sure you understand the fee structure and what that will cost you in the long run. OR. You could partner with Range for one flat fee, which gives you access to a team of advisors and tools to help with all aspects of your wealth management.
It’s our website, we’re allowed to self-promote :)