New Year's Resolution: Investment Strategy [Part 4]

Posted By Mark Kaelin

BreakingModern — The New Year is a great time to revisit or for the first time look at achieving financial independence. The plan of action for doing this is commonly referred to as an investment strategy. Now, before you roll your eyes and click the back button, note that an investment strategy is not some dry academic thing talking heads drone on about incessantly on CNBC. Well … all right, it is, but that’s not how we look at it.

Risk Versus Reward

Each individual must find their own true investment strategy. This is where the experts in the financial world get it wrong. A good investment strategy comes from you, not from your broker or your financial advisor. I cannot tell you what your investment strategy should be, because only you can do that.

Financial graphs investment strategy

The first factor you have to deal with is risk. How much risk can you take? Do you snowboard down steep slopes after jumping from a helicopter? Then I’d say you probably can take a lot of risk, in fact I’d say you enjoy it.

On the flip side, are you one of those people who never break the rules, never drive over the speed limit and never take unnecessary chances? Then I would consider you to be more risk adverse and in need of an investment strategy that matches your personality.

Remember, we are not using the mortgage or grocery money for our investing, so what you are risking is disposable income. However, risking disposable income may actually be more stressful for the snowboarder. These are the factors that make an investment strategy a personal choice and something no other person can make for you.

The other side of the equation is the reward you look to receive for taking the risk. Are you trying to make a few bucks to pay for a vacation in Colorado, or are you trying to earn enough to achieve financial independence at 30? Each result takes a strategy to achieve.

Recommendations

While your ultimate investment strategy is something your must determine for yourself, I can make a few recommendations about how you get there. The most important factor is time. This is not the lottery and there will be no instant millionaires created by stock market investing. No matter what your investment strategy is, the process is going to take time, and that’s time measured in years, not days.

When choosing a stock to invest in, use a time horizon of one to two years. What will the company look like in two years? Does the management have a good business strategy and are they planning for what the market will look like one year from now? How about two years from now?

Businessman drawing a growth graph investment strategy

Another important factor is flexibility. No one, no matter what they tell you, can predict the future with 100 percent accuracy. Something could happen in the next year that changes everything. The investment strategy you put into play a few months ago could be completely invalid now. You have to stay on top of it and be willing to change everything when it is required.

This is where you can be smarter than the average investor. When circumstances change, you have to change your investment strategy to match the new situation. The concept of buy and hold is not an investment strategy and it never has been.

Keep Retirement Separate

Some young investors confuse retirement planning with investment planning. Retirement is something completely different. When you make a retirement plan you’re looking at a time horizon of 20, 30 and even 40 years. When you couple length of time with the tax deferred nature of retirement accounts, you can implement a slow and steady investment strategy that does not require as much monitoring and maintenance. It is the proverbial tortoise and hare story.

We are talking about financial independence achieved through active investing strategies using our disposable income. The investment strategy under those circumstances is more dynamic and more hands on. Retirement planning compared to making a few extra bucks investing in the stock market are not the same thing at all.