Stay the Course on a Carefully Prepared Investment Strategy

There is always going to be a financial guru trying to sell you the hottest “proven” investment strategy. The truth is that there are many different investment strategies to choose from and there is no single perfect answer for every investor. 

That is not to say that all investment strategies are created equally, but what is right for you may not be right for someone else. Determining your specific goals and risk tolerance is the first step. Disciplined investing is key, and that means following through on your investment strategy before you judge its effectiveness.

The Process of Deciding Your Investment Strategy

The first step to becoming a disciplined investor is to decide on an investment strategy. The main points you will need to think about are uncertainty, asset allocation, your goals, objectives risk tolerance and diversification.

Planning an investment strategy starts with understanding your relationship with uncertainty. A defining characteristic of your investment style will be how much risk you are willing to take on. Aggressive investments may have a higher potential return, but a larger uncertainty of losing value at any given time. These assets tend to be volatile. Other investments may have a relatively stable price without much real uncertainty of losing significant value. Once you are able to define how much risk you are willing to expose yourself to, you can begin to determine which types of investments are best suited to meet your specific goals and objectives. This is where asset allocation and diversification come into play.                                                                                    

The goal is to design a portfolio that limit the risk that you may lose more money than your are comfortable with. The other goal is to earn a return on your investment. But markets move up and down, and new investors are often nervous when they see their investment begin to underperform. This is a common reflex for investors to change their mind about their strategy and sell the asset. 

Give Your Strategy Time to Mature

Fearing that you may have employed a losing strategy is a difficult emotion to overcome. It is one thing to talk about uncertainty in the abstract, but it is another to see the loss in your portfolio. But you should not allow emotion to be the ruler of your investment strategy. You must take the time to choose a strategy you can believe in, because if you sell your asset too early, you might miss out on a potential gain when the market corrects itself.

What happens is that if an asset begins to perform poorly some  investors are likely to sell the stock. Some investors stick to very small margins, others may panic at the dip in value, or any other number of factors could cause this to happen. The volatility of the market will may draw the value of the asset back up after a period of time, which can result in a gain for an investor who held onto it. However, there are events that may occur when it would be in your best interest to sell the position. This is why some people work with an advisor to help them make difficult decisions.

Investing Requires Discipline

Any time you make an investment, it is important to perform the due diligence required to feel comfortable in your purchase. This may include prospectus, research reports, earnings reports, news items or offering memorandums.  If your investment declines in value a short time after you buy it, and you did your research on the company you may feel more secure about holding onto the stock through volatile markets. This is the discipline that any investment strategy needs to be successful.