What you need to consider in an investing strategy

Having an investing strategy is important. It keeps you focused on why you’re investing, how long you’re investing for, what your risk tolerance is and what exactly you’re investing in.

If you don’t have a strategy, it could be very easy to get tempted by things that don’t align with your values. You might be more tempted to invest in things you don’t fully understand, such as crypto, or NFTs, or your friend’s ambiguous start-up. Or perhaps you might get FOMO when there’s a lot of media hype giving you a sense of urgency.

You may well get nervous when the market dips for the first time since you started investing and decide to cash out, selling all your shares and crystallising your losses.

The famous quote, ‘If you fail to plan, you plan to fail’ applies to investing too.

What to consider in your investing strategy

Risk tolerance

Are you someone who needs a bit of security and stability in your investment strategy or someone who can totally deal with the fluctuations in the market?

Understanding your risk tolerance will help you decide what percentage of your assets you want to hold in defensive (such as cash and bonds) vs growth (such as shares and property) assets.

If you have a long-term horizon, you may have an appetite for more risk, knowing you can wait out market dips and corrections since you don’t have to access your money anytime soon.

However if you’re near retirement, you may want to invest more money in low-risk assets, because you don’t want your investments to dip in value just when you’re planning to sell some of them and retire.

Keep in mind that your risk tolerance can change during the course of your life. You may be willing to take more risks when you’re young and single than when you have two kids to feed and a mortgage to pay off.

Since it’s sometimes hard for new investors to actually know what their risk tolerance is, it’s not a bad idea to trial micro-investing platforms, which allow you to invest micro amounts. That way, you can dip your toes in the water and see how you respond to market fluctuations.

Asset allocation

What assets do you have in your portfolio and what percentage have you allocated to each asset class?

Sometimes it’s worth looking at your super fund to see how you’re already invested (remember, super is for retirement, which usually has a long-term horizon, but it may give you an idea of how to think about your asset allocation).

By considering what percentage you want each asset – such as shares, bonds, cash and real estate – to hold, you can ensure that you’re comfortable with the balance (also known as the ‘weighting’) of each. Assets such as cash and bonds have a lower volatility and therefore are lower risk than shares and property.

Diversification

Instead of putting all your eggs in one basket, diversifying your portfolio allows you to include various sectors to ensure you have eggs in lots of baskets!

You can diversify by country or international markets. You can also invest in different sectors and industries, such as technology, finance and infrastructure. Or, you can diversify based on the size of companies, which are classified as ‘large-cap’ (large, well-established companies), ‘mid-cap’ (smaller, stable companies) or ‘small-cap’ (companies that have growth potential).

For the most part, you’ll probably hold a diverse portfolio with at least large-cap companies in it. And, of course, you can diversify your asset classes (cash, bonds, shares, property).

In case something were to happen to the market in one area, at least you are invested in other countries and industries, making the investing ride less bumpy and therefore less risky.

Time frame

Your investing goals may be drastically different if you are saving to buy a house in 3 years vs planning for retirement in 30 years. Knowing your time frame can help you determine the best strategy to use to reach those individual goals.

For short-term goals, perhaps investing in shares is too volatile; putting your savings into cash may be more suitable. As for long-term goals, perhaps cash is too conservative and investing in shares or property makes more sense.

Only you know your time frame and what strategy is best for you.

It’s worth checking in every few years to see if you’re on track to reach your goals, as things can change and you will need to adjust your portfolio accordingly.

Personal circumstances

Life happens and goals change. You may buy a house, combine finances with a partner, have a kid, receive an inheritance, lose a job or win the lottery. Each of these circumstances can drastically change the way you view your goals.

It’s okay to change your strategy – many of us do over time. One thing to remember, though, is that if something drastic happens (for example, you receive an inheritance after the death of a loved one), it might be best to wait 6 months or so and not make any impulsive financial decisions.

Allow for time to pass and think clearly about how the occurrence fits into your strategy. Ideally, you’d like your strategy to have a long-term focus, even if it includes some short-term goals.

Disclaimer: Any information here is general in nature and has been prepared without considering your personal goals, financial situation, or needs. Because of this, before acting on the general advice, you should consider its appropriateness, having regard to your unique situation. You should obtain and review the Product Disclosure Statement (PDS) and Target Market Determination (TMD) relevant to the product before making any financial product decisions. It’s also strongly encouraged to seek the advice of a professional financial adviser.

This is an edited extract from How to not work forever by Natasha Etschmann and Ana Kresina (Wiley $32.95), available now at all leading retailers.

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