If you want to build wealth, increase your sources of income, and stay financially stable, you'll need to use the money you have to make more money. And you achieve that by investing the money you have accumulated.
You can choose to invest blindly or have a specific strategy to keep you in line. While a blind investor will be relying on luck, a strategic investor will adopt different game plans to ensure he maximises returns and mitigate losses.
You can create an investment strategy based on the goal you want to achieve. An investor who wants to generate income will have a different strategy from one who wants to grow their initial capital. The former will invest in income-generating schemes and the latter in appreciating assets.
No matter what your end goal is, an investment strategy will help you stay in control of your finances and prevent you from being unstable. This article will explore five strategies you can incorporate into your investing strategy to ensure you stay financially stable. Read on.
Also Read: 7 Common Investing Mistakes To Avoid
Defining investment goals involves getting clear about your objectives. You do this by asking yourself a series of questions like:
Defining your investment goals will help you stay on track and keep you motivated to achieve them. It will also help you mitigate risks as they arise, document the process, and, most importantly they will help you make better investment decisions in the future. This ultimately helps you avoid losses, stay in control of your finances, and protects your financial stability.
To generate returns when you invest your money, you must be ready to accept some kind of risk. Different investors will have different risk profiles depending on their investment goals.
Ouma, 33, will have a different investment strategy to pay off his debt than when investing for retirement. One investment will require that he prioritises capital protection, while for another, he will want capital appreciation and high returns.
Understanding your risk profile will also help you decide the type of investments you choose, the type of risks you take, how you allocate and diversify assets, and make other decisions like rebalancing your portfolio. And it starts by knowing your risk tolerance and risk appetite.
Risk Tolerance: This refers to the amount of risk you are willing to take and the level of volatility you are ready to withstand to achieve your goal. Your age, net worth, time horizon, and comfort level are some factors that will help you gauge your risk tolerance which can range from conservative to aggressive.
Risk Appetite: refers to the level of risk you are prepared to accept to reach your goals. You can have a high-risk tolerance, but when your goal requires that you preserve capital, you will not be prepared to accept much risks.
Once you know the amount of risk you are willing to take and the amount you can accept, you are likely to invest responsibly to ensure you stay financially stable. Ignoring your risk profile can expose you to high losses when you are overconfident or minimum returns when you are fearful.
Return on Investment, or ROI, is the metric used to evaluate an investment's performance. It is expressed as a percentage; the higher the value, the greater the returns. Before you invest your money, you expect to make a profit.
Calculating your estimated ROI will help you know if an investment is worth it and also help you compare different investments and settle for the one with the returns you need.
Another important factor in knowing your ROI is that it will help you rebalance your portfolio. It will tell you how different investments in your portfolio are performing, i.e., where you gained or lost. In the long run, you'll know which investments align with your goals and needs and mitigate more losses.
Since calculating ROI doesn't account for other metrics like taxes, transactional fees, and costs other associated with a specific investment, you should also consider them when creating your investment strategy.
Like any other parent in their 30s, Agnes has various financial goals. She's saving for a downpayment for her first home, saving for a child's education, saving for Christmas vacation, and also saving for retirement. But she made one grave mistake when creating her strategy. She's saving for all these goals using one portfolio.
She has one bank account and one MMF account and is a member of one SACCO. All her finances are intertwined. If you had met Agnes and asked her how much she's saved for retirement, she wouldn't give you a straight answer. But she knows she's saving for retirement. She just doesn't know what percentage of her portfolio is for retirement and what's for educating her child.
Agnes was recently forced to revamp her finances after she met a financial advisor who made her aware of the dangers of not separating investments and the benefits of having a distinct portfolio. She now understands:
It is your money; you worked hard to earn it and should work even harder to protect it when investing. But it is easy to involve emotions in the process. You will likely make grave mistakes when you do that since your judgement is clouded. The result is that you will drive yourself to instability.
To ensure your financial well-being and prevent emotions from preventing you from reaching your goals, ensure that:
Stay Invested for the Longer: Before you make a rush decision to exit a position, determine what's causing the volatility. If it’s market factors that can correct themselves in the long term, stay invested.
Diversify: Diversification allows you to lower your losses, as another will perform better when an investment is underperforming.
Seek advice: Talk to a licensed financial advisor to guide you when creating an investment strategy or when you are about to make a decision that carries a lot of weight, like panic selling.
To ensure that your investment strategy is solid and your stability is protected now and in the future, factor in these three things when building it:
Investment Vehicle: The investment you choose will dictate how much return you will likely make (ROI), the types of risk you face and what you can do to maximise gains.
Financial Knowledge: How well-versed are you in investing? Are you experienced enough to avoid rookie mistakes? Before you put your money anywhere, conduct thorough research or seek professional help.
Liquidity: How easily can you access your money when you need it? Some investments make it hard to withdraw your money, and when you do it, you are penalised. Therefore ensure you always have cash at hand or invested in cash equivalents.
Staying financially stable requires taking calculated steps with anything that touches your finances. And even more when it comes to investing your money. Any mistakes can set you back to square zero and force you to start afresh.
Creating an investment strategy can be a tedious and time-consuming process. You will be required to conduct thorough research, read the fine print, and double-check for anything you might have missed. But it’s a process you can’t afford to skip if you want your investments to materialise. So, start creating a strategy to help bring your investment goals to life.