Every investor has a unique view and way of how they invest. When you start creating an investment plan and building a portfolio, there are many strategies you can use to help you achieve your personal financial goals. The method you choose will depend on your needs and the goals you want to achieve.
Viewed from many sides, making an investment plan and choosing a strategy is like buying the right shoes. You need one that suits your personal goals, whether that goal is saving for a down payment on a house, children’s education, or retirement.
When making an investment plan, you need a strategy that you are comfortable with within the long term. Perhaps you should not be tempted to change strategies frequently, which could potentially ruin your investment plans. In the end, the best strategy (or combination of strategies) is the one that works for you. The following are some basic strategies that you might consider when building an investment portfolio for the first time.
Investment Strategy – Building a Portfolio
- Asset Allocation
It is an investment strategy that divides a portfolio among asset classes — including stocks, bonds, and cash. Asset allocation helps us to strike a balance between investment risk and return (return).
Each of the asset classes mentioned above has different movements in different market situations. This means that each asset class has its risk profile and level of return. For example, stocks tend to offer the highest profit potential. Stock prices can also fluctuate, which means that apart from generating high returns, stocks may also experience losses or decline in value.
In contrast, cash tends to be very stable. The money in your savings account at the bank is most likely very safe. However, the trade-off for such stability is that savings accounts or other cash equivalents, such as certificates of deposit offer relatively low yields.
The proportion of each asset class an investor has will depend on their personal goals, investment period, and risk tolerance. The time horizon is the number of time investors must invest before they reach their goals. Then, risk tolerance is the willingness of investors to lose part of their investment in exchange for the potential for greater long-term returns.
Asset allocation may change over time. An investor in their 20s who is saving for retirement may have a portfolio mostly placed in stocks. Stocks can offer the greatest potential returns. With a period of 40 years before investors need the funds, they may have plenty of time and availability to cope with any downturn in the stock market.
A person who is retired and needs more immediate access to cash may have more fixed-income investments. Take an example of bonds, which are less volatile and therefore less likely to experience sharp declines when investors need them.
One way to manage risk in a portfolio is through diversification, building a portfolio with various investments in different assets. Diversification can help investors avoid having all their eggs in one basket. Or, the more familiar term is don’t put all your eggs in one basket.
Just imagine a portfolio invested in only one share of an electric vehicle company like SPAQ stock. If the price of energy falls, the entire portfolio value will fall.
Now, imagine a portfolio that holds stocks from all sectors in companies of any size worldwide. Not only that, his portfolio has various bonds and even other investments such as real estate.
Like asset allocation, the idea here is that these different investments will behave differently as market conditions change. For example, U.S. stocks may not perform as well as European stocks, and energy stocks like SPAQ stock may not perform as well as medical company stocks.
Your portfolio can change over time. During a bull market, you may find stock investments performing well. So, now stocks have a much larger composition than your previous portfolio.
Remember that when balancing your portfolio, adjust it based on personal goals, time horizon, and risk tolerance. So, when there is a shift, investors may want to buy or sell assets to get their portfolios back in line with the planned asset allocation.
Dollar Cost Averaging
Dollar Cost Averaging is the process by which investors regularly invest, making purchases of assets at any price. For example, an investor might choose to invest $1000 a month in an index fund that tracks the S&P 500 or Micro E-mini S&P 500 Index Futures.
The share price for the fund will most likely vary from month to month. Although the number of money investors used to buy shares did not change. Under these circumstances, investors buy fewer shares when the price is high and more when the price is low.
These investment strategies and plans can help investors reduce buying at high prices and selling at low prices. And because investments are made on a regular schedule with a set amount of money, this strategy is one way for investors to avoid emotional investing.
Buy and hold
Investors who use a buy and hold strategy will usually buy stocks and hold them for the long term, regardless of short-term market movements. Investors who have this investment plan believe that they will achieve future returns despite fluctuations in the market in the short term.
For instance, if you are one of the investors who has been doing your homework on a specific stock like SPAQ stock. Then you will dedicate yourself to work on this stock despite its price volatility.
Fluctuations in the market are regular occurrences, but investors may still feel nervous and want to sell their shares at the first sign of a downturn. However, this trend can be detrimental to investors, as selling the stock locks in any losses they may incur means they can miss the subsequent rebound in price. A buy-and-hold strategy might help control this trend.
In addition, a buy-and-hold investment strategy can help investors minimize the costs associated with buying and selling. Finally, it can help increase overall portfolio returns.