Investment Strategy: What It Is and Why It Matters

An investment strategy is a structured approach to making investment decisions. It can help an investor think about financial goals, time horizon, risk, asset allocation and other factors before choosing how to invest.

What Is an Investment Strategy?

An investment strategy is a plan or framework that guides how a person approaches investing. It may include decisions about what types of assets to consider, how much risk may be involved, how long money may remain invested and how investments may be reviewed over time.

Why Can an Investment Strategy Matter?

Without a clear approach, investment decisions may be influenced primarily by short-term market movements, emotions or incomplete information. A structured strategy may help an investor focus on longer-term financial objectives.

However, having an investment strategy does not guarantee profits or protect against losses. All investments can involve some level of risk.

Important Parts of an Investment Strategy

Financial Goals

The purpose of an investment can influence how a person approaches investing. Different goals may have different timelines, funding requirements and levels of flexibility.

Investment Time Horizon

The amount of time before invested money may be needed can affect decisions about risk, liquidity and investment options.

Risk Considerations

Investment risk can include the possibility that the value of an investment may decline. Investors may also consider their financial capacity, need for liquidity and ability to manage market fluctuations.

Asset Allocation

Asset allocation involves dividing investments among different asset classes. The mix of assets can influence the overall characteristics and risks of an investment portfolio.

Common Investment Approaches

Long-Term Investing

Long-term investing generally focuses on holding investments over an extended period. The approach may involve experiencing multiple market cycles and periods of price fluctuation.

Active Investing

Active investing generally involves making ongoing decisions about buying, selling or changing investments. This approach can involve additional costs, research requirements and risks.

Passive Investing

Passive investing generally aims to follow or track a particular market index or investment approach rather than frequently selecting and trading individual investments.

Regular Investing

Some investors invest fixed amounts at regular intervals. This approach may involve purchasing investments at different prices over time, but it does not eliminate investment risk or guarantee positive returns.

A Simple Example

Why Consistency Can Be Important

Market conditions can change frequently. A strategy may help an investor evaluate whether a decision is consistent with financial goals rather than reacting only to short-term events.

At the same time, an investment strategy may need to be reviewed when financial circumstances, goals or time horizons change.

Factors That May Affect an Investment Strategy

• Financial goals and priorities.
• Investment time horizon.
• Risk tolerance and financial capacity.
• Need for liquidity.
• Income requirements.
• Investment costs and taxes.
• Existing investments and financial obligations.
• Changes in personal circumstances.

Common Mistakes to Avoid

• Making decisions only because of short-term market movements.
• Assuming past performance guarantees future results.
• Ignoring investment risk.
• Using an approach without considering financial goals.
• Ignoring costs and other factors that can affect returns.
• Failing to review a strategy when circumstances change.

Key Takeaways

• An investment strategy is a structured approach to investment decisions.
• Financial goals, time horizon and risk are important considerations.
• Different investment approaches can involve different costs and risks.
• A strategy does not guarantee profits or prevent investment losses.
• Investment strategies may need to change as circumstances evolve.