How to Develop An Ultimate Investment Strategy
By: Ann Inw
Tags: Wealth, Finance, Personal Finance, Investing, Strategy

How to Develop An Ultimate Investment Strategy

#2 Don’s stay within what’s conventional

Photo by bruce mars on Unsplash

When I first began investing, I remember feeling overwhelmed. Not only I was learning something from scratch and getting to know all the necessary financial jargon, but I was also provided with a plethora of options.

It takes me quite some time to decide that I’m going to invest in a riskier instrument, like stocks. But after I have decided, my work was not over yet. I had to also define my strategy.

There were a lot of questions to answers.

Will I just put my money on an index fund?

Will I do dividend investing?

Do I go for growth tech stocks, or invest in defensive stocks?

Will I be a long term buy-and-hold or opt for something more short term?

All these are questions a beginner needs to answer in order to pick the best strategy.

Why finding an ultimate strategy?

I’m a fan of optimizing everything in my life. So naturally, if there’s an optimized investing strategy, I’d go for it. In fact, isn’t that what first motivated you to invest? To grow your wealth.

If you can do it the best way, then why not?

Also, another reason is the realization that there’s no one-size-fits-all investment strategy for everybody. Your parents might advise you something, but remember that they are at a different stage of life, not to mention they spent their youth in a different economic situation.

The same goes for advice from other people too. You can’t just copy Warren Buffet, for example. Everyone’s situation is unique. That’s why you got nothing but yourself when it comes to finding your own perfect strategy.

1. The first thing you should do is dedicating time to deep research

Fast forward to today, I found that putting more effort and taking more time when researching is the best thing I did.

I was waiting for months before I bought my first stock. I read a lot of books, watched videos, and did a lot of mental and financial preparation. In part, the market was also in a downtrend at the time, so wait-and-see was a sensible thing to do.

Mark Minervini, one of the famous investors whose books I love to read, mentioned that success means opportunity plus preparedness. It’s foolish to immediately jump. You need to polish your preparation first.

I met too many beginners who would just jump without knowing even some basic knowledge. The recent surge of retail and young investors makes it worse. As a result, seeing someone posted on Twitter or investing forums that they just lose money over an investment mistake is a common occurrence.

To do list:

Take time, 1–2 months is enough, depending on the intensity of your research. You can go longer if you are not sure.

Use virtual money first while you’re learning. (Or you can put a small amount if you also want to train your psychology.)

2. Read and watch how other people do it — and be diverse

When I first learning, what I did was researching other people who have done investing successfully. They were legends like Warren Buffet and Peter Lynch. The controversial ones but geniuses like Jesse Livermore. I studied about people who are successful only recently too.

I read the classics like The Intelligent Investor, best selling ones like How to Make Money in Stocks by William O’Neil. My favorite is Peter Lynch’s book One Up on Wall Street.

On top of that, I didn’t limit myself to what’s conventional. I read books about ultra-aggressive trading, not just the “slow and steady” type of investing books. I even read books about the psychology part of investing (behavioral investing.) I read books from traders, investors, fanatics, and skeptics. I read opinions from economists and scholars who don’t believe in the market at all. I read books about contrarians and unpopular opinions.

I’d highly recommend not limiting yourself to what’s conventional. You need to be open-minded. Your brain should be like a sponge. It comes with no prejudice and it doesn’t discriminate. This is the key to get the best knowledge possible.

When you are in the research stage, you got to say yes to everything.

I watched a lot of videos on Youtube too. A lot of people are sharing their investing journey on that platform. Some do dividend investing like this guy, some chase FIRE lifestyle like this couple, and many more. It’s fun to explore and see if their strategy could be yours too.

To do list:

Read a lot of books. Motivational, practical, skeptical, unpopular opinions, and the must-read classic.

Study about successful investors (read their books or their biographies.)

Watch finance YouTube videos. Often it adds a bit of fun to your learning process.

When not sure about a financial term, look it up on Investopedia.

Read financial news sites, such as CNBC and MarketWatch.

Photo by bruce mars on Unsplash

3. Getting to know your financial goals

Now after looking around at other people who have successfully done it, what you need to do next is to look inside yourself and define your personal goal.

You can ask questions to yourself such as:

What is your investing goal?

How long do you plan to achieve that?

How is your current financial situation?

You can also list your goals, for example:

To retire comfortably. To buy a home or other expensive stuff. To prepare a good future for your family (College fund, etc). To significantly multiply your wealth or a portion of it. To retire early. To prepare for marriage (A thing in my culture).

… And many more.

To do list:

Write down your financial goal in very great detail. You can write it like a journal about how you imagine your future self would be.

4. Now create your own strategy

Now you can pair what you have learned and what you want to create one ultimate strategy that would work best for you.

I will take myself as an example.

My situation here is that I am still quite young and single. I don’t have family on my own, so no children and dependent. With my age, I have plenty of productive years ahead.

My first investment goal is to retire comfortably. In this case, I would need to go long term and would do well with a mix of a well-performing mutual fund, some ETFs/index funds, and government bonds. My strategy is merely dollar costs averaging where I contribute a certain amount regularly each month, no matter the market condition would be.

But it’s not enough for me because I have other, bigger financial goals.

I want more and I am not ashamed of that. I want to significantly grow my investment with higher return options so I can reach those goals.

My situation makes it possible for me to take a higher risk of investment. I can afford the risk. I can try growth investing. I also have a tech background so tech stocks could be my specialty. It is what Warren Buffet would call, “Within my circle of competence.” Peter Lynch also advised to pick an industry you are already in.

So, what’s left after the retirement fund is paid, goes to my aggressive portfolio. At the moment it comprises almost half of my all investment.

In short, I created a medium risk portfolio for the retirement fund, and be aggressive on everything else.

Also worth mentioning is my emergency fund. I put it in a low-risk instrument — a money market fund consisting of CDs and short-term corporate bonds with an annual return of 6–7%.

Your situation might be different. For example, you can go dividend investing if you are retired (early or not). This method is perfect because it is defensive. If you need the money soon, like for college tuition, you will need to park your money into less low-risk instruments but with decent gain.

5. Rinse and repeat

Over time, you will find out that the journey does not completely end. After all, investing is a learning process.

It follows this cycle, a little bit of modification from David Kolb’s model:

You learn

You practice what you learned

You find out what works and what doesn’t

Rinse and repeat.

At some point, you will wonder whether the strategy has been working well. It might be because the market is in a bull run but your portfolio is underperforming. Trust me, a FOMO can make you question your entire approach. When the opposite happens — an imminent market crash — your strategy is even more tested.

And that is okay. I believe it is even encouraged.

Being flexible and adaptive is the most important trait to survive the market. What people see as an inconsistency (like when warren buffet buy tech stock or gold stock), I saw it as merely adapting. The economy is dynamic. It constantly changes you either adapt or get crushed.

On top of that, your personal situation could change too. Your investment strategy needs to adapt to changes in your personal life. For example, a new baby requires another specific financial planning.