Investment Strategy: Must for wealth creation

According to Wikipedia Investment strategy in Finance is a set of rules, behaviors or procedures, designed to guide an investor’s selection of an investment portfolio. Investment strategy is a back bone of successful financial planning of an investor. The Investor should fix his/her own strategy before taking first step in Financial planning.

But what should be the ideal Investment strategy? Individuals have different profit objectives, and their individual skills make different tactics and strategies appropriate. It means each investor’s investment strategy could be different based on age, risk profiling and time horizon of the goals.

Here I am sharing my investment strategy which are converted into important steps I take for long term wealth creation

First step:

My investment strategy begins with determining my goals first. Always set your goals first and start Goal based Investments. Investing without a goal means investing randomly which may not be sustainable and can be stopped any time if any emergencies happened. You should know what are your long term goals as well as your short term goal. Long term goal may include retirement planning and buying a house. Short term goals may include foreign/domestic vacation, buying a car, setting aside some money for higher education etc.

Second Step:

The second step I do is I undergo Risk Profiling process for myself. Risk profiling s a process of defining investor’s risk tolerance – attitudes, values, motivations, preferences and experiences. It is a process by which you understand what type of investor are you whether conservative, moderate or high-risk taker. It helps you to chose proper financial products according to your risk appetite.

Third Step:

Then I decide asset allocation for achieving that particular goal. I do asset allocation for each of my goal. Asset allocation depends on time frame of every goal. Asset allocation is a very important part of creating and balancing your investment portfolio. It plays an important role in maximizing the portfolio’s overall return. The most famous phrase ‘Never put all your eggs in one basket’ is used to simplify the term Asset allocation.

Fourth Step:

Then I decide the financial assets to be invested in according to asset allocation. The different options of asset classes for investment purpose are Equity, Debt, Gold, Cash and Real Estate etc. These asset classes have different characteristics, features and risk and return. Risk and return are directly co related with each other. If you want to earn more return you need to take more risk.

Fifth Step:

There are plenty of options available in each of the asset classes. I try to choose right mix of these options to minimize my downside risk. My focus is always on managing the downside risk rather than maximizing the returns. Never put all your eggs into the same basket.

Sixth Step:

My most important investment strategy is I stay invested in the chosen financial assets until my goal is achieved. Only long term investment can create wealth. You should stay invested for a long time to make most of the Compounding factor to multiply your invested amount.

Seventh Step:

I review my portfolio periodically once in a year. Review is very important to know the performance of my chosen financial assets. If I find , the performance is not as per my expectation then I change it. But frequent churning of the portfolio is not advisable. Don’t churn your portfolio based on share market fluctuations. It hampers the long term earning capacity of your portfolio.

Eighth Step:

As my goal is nearing I start doing Systematic Transfer Plan(STP) from my equity mutual fund to debt mutual fund. This way I make sure my accumulated corpus is safe and free from market fluctuation. Ideally this process should start 2 years prior to your goal. But if you achieve the targeted corpus of the particular goal early this exercise should start immediately.

Ninth Step:

• I prefer mutual fund investment over direct equity.

• In direct equity I prefer to invest only in top rated Bluechip stocks.

• I always expect reasonable rate of return from my investment.

• I never see my value of my portfolio on daily basis.

• I never invest on any random advice from my friend and relatives.

• IMPORTANTLY I choose only those financial assets which I can understand. I always keep my investment simple.

Investment strategy is all about making sure that your Personal Finance BASICS are done prior to investment. Make sure you have adequate Life cover for yourself and Health Cover for you and your family. Second thing is you have set aside your Emergency fund.

So when are you going to decide your own Investment Strategy?