Investment strategy: what is it and how to choose the right one

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Investment strategy: what is it and how to choose the right one
Investment strategy

Investment strategy: Michael was paid an unexpected bonus at work. And literally in the morning, she heard from a colleague that one large company should soon pay big dividends and urgently need to buy its shares. Julia did just that. But the dividends were canceled, the share price fell, Michael remained in the red and decided never to invest again. We will tell you why you cannot act spontaneously in the stock market, what a well-thought-out investment strategy is for and how to choose it.

What is an investment strategy?

This is a clear plan for your actions on the stock exchange. It should take into account for what purpose and for how long you want to invest money, how often you intend to make transactions, what you will focus on in your decisions. And also – what profit do you expect and what losses are you ready to put up with.

The strategy will help you make a balanced investment portfolio, avoid rash decisions, and therefore reduce the likelihood of losses.

Investments are always associated with the risk of losing money, but if you act simply from the call of your heart or on the advice of friends, this will only complicate the situation. Therefore, you need to stick to a clear plan. At the same time, do not forget to revise it, for example, when the situation on the market changes a lot.

Investment strategy Steps

1. Decide on a goal

Answer a few questions for yourself: why do you want to invest, how much are you willing to invest, and when exactly do you need the money.

Some people want to save up for a car with the help of investments, others expect to pay for their children’s education, and someone plans to secure a comfortable old age. You can have several goals, just like investment portfolios.

2. Set a deadline

It directly depends on your investment goal, or rather, on exactly when you need the money. According to the term, the strategies are:

  • long-term – you expect a return on investment no earlier than in three years;
  • medium-term – you are ready to invest for a period of one to three years;
  • short-term – you plan to withdraw money from the stock market in less than a year, or you may even need it at any time.

A long-term Investment strategy allows you to choose almost any instrument with different levels of risk and expected return. For example, bonds or units of closed-end mutual funds (mutual funds) with a maturity of 10 years or more, the yield of which is sometimes particularly high.

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Investments in precious metals are also suitable – their prices fluctuate greatly and may fall in a year or two. But over the long haul, they tend to outperform inflation and serve as a defensive asset during periods of global volatility in financial markets.

When you’re playing for the long haul, it’s especially important to spread your investments across different companies, industries, and types of securities – to diversify your investments. In this way, you will make your portfolio composition balanced and reduce risks.

Michael took his daughter to first grade and thought that in 11 years she might need money to pay for her studies at the university. Yulia has a stable job, and she could use part of her income for investments. If she still decides to do this, just a long-term strategy will suit her.

The medium-term Investment strategy has a slightly smaller set of tools, but still quite large. You can choose assets that, although they fluctuate in price, usually make a profit on the horizon of 1-3 years. For example, shares of reliable companies that regularly pay dividends, federal loan bonds (OFZ) or reliable corporate bonds, shares of exchange-traded, open or interval mutual funds.

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Frank James, Michael’s boss, is going to retire in three years. The ideal medium-term strategy for him is to keep savings from inflation and provide himself with additional income when he is no longer working.

In the case of a medium-term and long-term strategy, there is no need to constantly monitor quotes, it is enough to monitor the situation on the market as a whole and periodically adjust the composition of your portfolio.

With long-term investment, you can get additional income if you use an individual investment account (IIA). Do not withdraw money from it for three years, and in addition to the profit from investments, you can receive an investment tax deduction.

If you may need money soon, choose a short-term strategy.

Only liquid assets are suitable for you – that is, those that can be sold at any time. For example, freely traded stocks, bonds, shares of open-ended and exchange-traded mutual funds.

Artyom has a good salary, he doesn’t have a family yet, and he plays on the stock exchange with free money. For him, the stock market is more of a hobby and entertainment. He has no distant goals, but in winter and summer he goes on vacation and tries to earn money on investments by this time. He sticks to a short-term strategy.

The profitability of short-term investments depends much more on temporary fluctuations in the quotes of your assets than in the case of long-term investments. If you are aiming for a quick profit, then you must be prepared for serious losses.

3. Estimate how much time you plan to spend on investments

If you are not ready to constantly monitor changes in financial markets, read news and study company reports, your option is a passive investment strategy. It is optimal for long-term and medium-term investments.

In this case, you do not need to devote much time to analyzing the current situation. However, even with a passive approach, one cannot simply collect a portfolio and forget about it – any investment requires control. From time to time, you need to evaluate your assets and their risks, if necessary, adjust your set – for example, once a quarter or every six months.

In addition to work, Michael spends a lot of time on classes with his child he is ready to become an investor, but he has no time to follow the stock market. Therefore, a passive strategy is suitable for her.

Investors who are ready to respond quickly to news and trade literally every day use an active investment strategy. They choose instruments that can bring the maximum income and constantly monitor the best time to buy and sell.

An active strategy allows you to get more profit, but at the same time it is associated with higher risks. The success of such a strategy depends on how correctly you assess the situation on the market. And you need to keep in mind that active investors have to pay more commissions for operations to the broker and the exchange than passive ones.

Artem has the time and desire to understand how the stock market works. He, as an active investor, studies financial reports every morning and evening, tries not to miss a single opportunity to earn money and makes many transactions.

When choosing an investment plan, consider your character as well. Active strategies require a lot of energy and strong nerves. If you are very worried about losing money and can panic, you should not start a risky game.

4. Decide how much risk you’re willing to take

According to the level of risk, investment strategies are divided into conservative, moderate and high-risk. Generally, the greater the potential return on an investment, the more likely it is to lose everything.

A conservative investment strategy is suitable for those who do not want to put their capital at risk. The main goal of such investors is to protect their money from inflation. Most often, conservative investors choose OFZ, securities of the largest companies and precious metals.

You should not expect a high return on such investments – as a rule, it will be at the level of the key rate of the Bank of Russia, sometimes a little higher. However, such investments can bring more than interest on a bank deposit (especially if a person issues a tax deduction ). And the probability of losses is not very high.

Frank James is completely unprepared to lose his savings. His conservative portfolio consists mainly of OFZs, highly rated bonds and a few stocks of the most reliable companies. Such a composition of the portfolio will allow him to increase his savings without worrying too much about their safety.

If, on the contrary, you are chasing the maximum profit and at the same time easily put up with the loss of your investments, a high-risk or aggressive strategy will suit you .

More often, this approach is chosen by young people who have the time and energy to restore their savings in case of losses. Aggressive investors often invest in shares of companies undervalued by the market. Such securities can both rise sharply and bring big profits, or leave you with nothing.

Artem allocates 10% of his salary for investments every month. He likes to take risks, and mainly in his portfolio – stocks of second-tier companies and derivative financial instruments. According to Artem and the experts he trusts, his shares have good upside potential. But in case of failure, he is quite ready to say goodbye to his money.

Most investors still prefer a moderate investment strategy. It involves the choice of financial instruments with different levels of risk. For example, a third of the money can be invested in the most reliable bonds – the state and the largest companies, as well as in precious metals. Send half to the shares of the first quotation list and shares of index mutual funds. And a small part of the risk is to buy potentially more profitable shares or bonds of medium and small companies.

With a moderate strategy, an investor forms a balanced portfolio that allows you to get a higher return than a conservative one, but with a lower level of risk than an aggressive one.

Michael settled on this particular strategy: he does not want to take big risks, but the money for his goal will not be needed soon, so she is ready for small losses. Michael invested 20% in highly rated corporate bonds, 20% in OFZs, 20% in shares of the largest companies, 30% in exchange-traded mutual funds and another 10% in shares of small and medium-sized enterprises with good potential.

An investor’s attitude to risk is often related to how much time he is willing to spend trading. Moderate and conservative strategies usually do not involve high activity, while an aggressive investor can make dozens of transactions per day.

I’ve decided on a Investment strategy. What to do next?

First you need to properly understand the work of the exchange and the features of various financial instruments.

If after training you are ready to trade on your own, choose a broker and start investing.

When it is still difficult for you to navigate the exchange, you can turn to an investment advisor. He will tell you how to build an initial portfolio, and then help you adjust it if necessary.

Investment advisors are responsible for their recommendations – unlike many investment bloggers, who do not always act in your interests. It is worth concluding an investment consulting agreement only with specialists who have a license from the Bank.

If you do not want to conduct transactions yourself, you can entrust this to a trustee. He will offer you a choice of ready-made standard investment strategies or develop an individual one for you. It remains only to decide which one suits you. And in any case, it is better to monitor the state of your portfolio from time to time.

If it seems to you that the strategy does not work, brings insufficient profit or even losses, discuss with the manager the possibility of changing the standard strategy to another one or adjusting the individual one.

1 COMMENT

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