Create an Investment Strategy that Works for Your Personal Situation

It’s never been easier to access a range of investment options. Today’s investor can buy stocks across a range of sectors with just the click of a button, they can hold cryptocurrencies alongside US Treasury bonds and property, and easily gain exposure to markets as far afield as Europe and Asia.

But just because you can, doesn’t mean you should. Or, at least, it doesn’t mean you should spread yourself and your finances too thin by throwing yourself into every available asset class. Rather, start by creating an investment strategy that works for you – one that is clearly aligned to your goals and ambitions, but also takes into account your appetite for risk, tax implications and the easy availability of cash.

In recent years I’ve noticed how enthusiastically Millennial investors (aged 25 to 40) have embraced the multitude of investment options at their disposal. They also have higher expectations for annual returns from their investment portfolios than those aged 41 to 56 (Generation X) and the Baby Boomers (57-75).

It would certainly seem that for many Millennials risk and reward go hand in hand, but that should still be achieved in the context of a balanced approach to investing. To achieve this, I advocate two important steps:

  • Staying informed about financial developments, market movements and the performance of various investment assets by reading extensively, signing up for free online courses and webinars and keeping an eye on reputable news sources.
  • Creating an investment strategy that follows your goals. A realistic timeline guides your investment decision making based on your stage of life and your available resources.

In both cases, there are important questions to be asked. Let’s take a look.

How Do I Plan to Fund My Goals?

Here’s where a well-constructed investment strategy comes into play. Ideally this plan of action should follow a rough timeline of your goals. For instance, if you have young children, then the focus at this stage of your life might be on starting a 529 college savings plan to secure their access to future possibilities. If a successful retirement is critical, then you would factor in saving towards this goal from an early age. The same applies to prioritizing paying off your home.

Each stage of life brings with it important financial and lifestyle priorities which must be funded and catered for if you are to achieve these goals.

Creating a list of current priorities and future goals enables you to build a strategy which matches your needs, while taking into account your current expenses and income.

Once you’ve put your goals down on paper and created an investment strategy to support your unique ambitions, without completely tying up liquidity, then you can track the progress you are making towards achieving your goals.

How Much Risk Tolerance Do You Have?

When it comes to investing, a degree of risk tolerance is healthy and desirable – after all, if you are too busy second guessing what could go wrong you may find yourself unable to take advantage of exciting opportunities. On the other hand, a heady appetite for risk – particularly when it comes to long-term concerns like retirement – could actually prove reckless.

The secret when it comes to risk tolerance is to understand where you sit on the continuum. If you have low risk tolerance, then you need to find products and assets that suit your style of investing. Or at least build in a balance of low-risk and higher-risk investment products within your portfolio.

Interestingly, Millennial investors and the new generational cohort Generation Z (up to age 24) are naturally more positive about how they expect their investments to perform. Even during the Covid-19 pandemic this slice of the population has seen a notable hike in risk tolerance. This is playing out in a greater appetite for trading equities and derivatives, as well as cryptocurrency exposure.

How Does Asset Allocation Work?

The asset allocation process hinges on acquiring the right mixture of assets, from stocks and bonds, to cash, real estate and alternative assets. A good combination of assets will be more robust and able to perform well throughout market cycles.

Embedding balance into your investment strategy also extends to how you, and your financial advisor, set about structuring your portfolio.

There are a variety of asset allocation strategies which you should discuss with your financial advisor, including:

  • Strategic Asset Allocation: Using your risk tolerance as a starting point, a strategic asset allocation works by determining what percentage of assets should be invested in the various investment categories. The ethos behind this strategy is that the in-built efficiency of the markets means it is hard to outperform the overall market, which is why this approach is often likened to a buy-and-hold strategy. Although rebalancing portfolios from time to time is necessary to ensure alignment with your goals.
  • Tactical Asset Allocation: An active management strategy, tactical asset allocation seeks to take advantage of economic cycles and market trends in the hope of securing higher returns by responding to macroeconomic developments. By building in diversified holdings, rather than relying on a single asset class, it is possible to reduce risk.
  • Dynamic Asset Allocation: Another actively managed approach, dynamic asset allocation is more labor-intensive and, therefore, more costly. Constant adjustments are made to the holdings in the portfolio, based on economic factors and the mixture of asset classes to which the investor has exposure. This approach is heavily dependent on the skills of the portfolio manager.

How Can I Use Tax Loss Harvesting to Lessen My Liabilities?

Part of creating an investment strategy is factoring in how best to lessen any tax liabilities. An effective approach to consider is tax loss harvesting, which is particularly beneficial for those in higher tax brackets.

Tax loss harvesting involves selling some investments at a loss to offset gains and reduce your overall tax bill. But don’t get so caught up in the tax savings that you lose sight of your overarching investment goals. From a financial planning perspective, it is possible to reinvest immediately in a similar replacement vehicle that is in line with your investment objectives, to keep you on track.

Due to the complexities of tax loss harvesting I always recommend speaking to your financial advisor about the implications, the transaction costs and the possible impact on your investment strategy. If you would like to set up a time to talk about tax loss harvesting, or if you are in need of expert advice to help you shape an investment strategy around your goals, then please set up time for a chat.

Investment advisory services offered through Equita Financial Network, Inc. (“Equita”). Equita also markets investment advisory services under the name Method Financial Planning, LLC. The foregoing content reflects the opinions of the author(s) and is subject to change at any time without notice.

Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.

All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.