A well-defined investment strategy is a plan that aims to produce long-term financial growth, taking your personal goals, risk tolerance and time horizon into consideration. It can also help you align your portfolio with your ethical beliefs and social values.
The strategy you choose depends on the financial goals you have in mind, such as saving for retirement or a major life event. You may also prioritize generating income to support yourself or your family, or leaving a financial legacy for your children.
Your risk tolerance also plays an important role in deciding how much volatility you can withstand, as well as the types of investments you’ll hold. For example, you can diversify your portfolio by holding a mix of stocks and bonds, with the goal of balancing risk and reward. Stocks are considered the more volatile asset class but have higher potential returns, while bonds offer lower risk and potentially lower returns.
Some investors use a passive investing strategy, which involves buying low-cost, diversified index funds. This approach allows you to invest on a regular basis and take advantage of dollar-cost averaging, which results in fewer transaction costs and realized capital gains when shares are sold for a profit. Other investors prefer a hands-on approach and select individual stocks, combining firm analysis with predictions on share price trends to build a customized portfolio. Regardless of the strategy you choose, it’s important to stay disciplined so that you can follow your plan and avoid making emotional decisions.
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