 Personal Finance PowerPoint Presentation Investment Strategy Prepare to get financially fit by practicing personal finance. Most of this information can be found at Investopedia Investment Strategy, which you can find online. Take a look at the references, resources, continue your research from there. This is by James Chin, updated November 11, 2021. What is an investment strategy? The term investment strategy refers to a set of principles designed to help an individual investor achieve their financial and investment goals. So obviously when we're thinking about investment in general, we want to think about what are our goals? What are we trying to achieve? Retirement goals, other targeted goals such as saving for college tuition, for example. And once we have the goals, then we want to think about what's the approach? What's the strategy that we're going to be putting in place in order to achieve them? This plan is what guides an investor's decisions based on goals, risk tolerance and future needs for capital. They can vary from conservative where they follow a low risk strategy where the focus is on wealth protection. So notice that when we think about the strategies that we put into place, we have to think about what our overall goal is, what's the time horizon that will be in place and what is our personal risk tolerance levels that we want to be able to put in place and can deal with. Well, others are highly aggressive. So some people like higher risk and the possibility of the higher reward and some people are more risky verse, seeking rapid growth by focusing on capital appreciation. This concept of risk tolerance is an interesting one because it's often presented as though the person that has a low risk tolerance is someone that just can't handle risk and therefore they put all of their investments into those that don't have the potential for higher returns or as someone who is more aggressive or has more tolerance for risk can put their assets into investments that have the ability to pick up the higher returns. But you can also think of it as though people that are more low risk tolerance may be people that are just able to delay gratification as well. Whereas if you're more aggressive and you have a higher tolerance for risk, it might be because they're looking for returns sooner. They're looking for the gratification sooner even though they're taking on more risk to do that. So remember whether you're low risk tolerance or high risk tolerance isn't necessarily the point in terms of the main strategy. You want to be thinking, okay, where do I stand at this point in time? What's the goal? What's my time horizon? And what would be the appropriate investments given those categories and then take into consideration your risk tolerance level within that overall picture. Also noting that when you're talking to people that are in the business of trading, they might be tending to be more aggressive type of people and they're trying to convince you to invest in things. They may tend to be more aggressive, maybe tending to take this stance that people that have a low risk tolerance are not the go-getters out there or so on. But just remember that delaying gratification is often something that's quite difficult and what does lead towards more benefits in the long run. So just some things to keep in mind. Investors can use their strategies to formulate their own portfolios or do so through a financial professional. So obviously when you're thinking about investments, your question would be, do I need someone to manage my portfolios or can I do it myself? These days, that's a big debate on these things. These days with the access to things like mutual funds and types of funds that can help you to diversify with limited resources versus do you think a professional stock picker, for example, or portfolio manager can beat the market? That's always the question. And there's big debate on that for a long time. Strategies aren't static, which means they need to be reviewed periodically as circumstances change. Understanding investment strategies. Investment strategies are styles of investing that help individuals meet their short term and long term goals. Strategies depend on a variety of factors, including your age. So obviously that's going to affect your time horizon, your goal. What are you saving for? Retirement, college fund, tuition, so on. Lifestyles, obviously when you're saving, you're going to have to do that thing of delaying gratification most likely, right? If you want to have some money in retirement, then you can't spend it all paycheck to paycheck generally. It's just the way it's going to end up being so you got to think about those kind of financial situations. Clearly, the more money you make, the easier it's going to be to save and meet your goals. Available capital, personal situations, family, living situations, expected return. So what's the market going to be giving you in an expected return? Remember that oftentimes, if you're looking for the higher return types of investments, you're taking on more risks. So we've got this parallel or this risk and reward thing that we've got to be thinking about as we do our investing. This, of course, isn't an exhaustive list and many include other details about individual. These factors help an investor determine the kind of investments they choose to purchase, including stocks, bonds, money market funds, real estate, asset allocation and how much risk they can tolerate. Investment strategies can vary greatly. So obviously when you're talking from person to person, investment strategies will be changing a lot from person to person. One, because their goals are going to be changing. If you look at basically someone's life cycle and you try to think about someone that's in a similar area of the life cycle or average types of investments per life cycle, you might see more similarities and so on. But again, obviously investment strategies are going to be tailored and unique to you. So there isn't a one size fits all approach to investing, which means there isn't one particular plan that works for everyone. So you can use heuristics, you can think about people's normal life cycles, but clearly everybody's unique. So this also means that people need to reevaluate and realign their strategies as they get older in order to adopt their portfolios to their situation. So we talked about the time horizon as time horizon changes and there are tools that can basically help us to do that. So it seems quite overwhelming, but there are tools that we could do that quite effectively in a fairly simple way in general. So investors can choose from value investing to growth investing and conservative to more risky approaches. As mentioned above, people can choose to make their investment decisions on their own or by using a financial professional. So that's again another big, it's always a big question because you're going to pay the financial professional. And sometimes the financial professional might be more aggressive because they're trying to prove themselves as the financial professional. They're trying to beat the market, which again, it's hard to beat the market because you could just put your money in index funds, which are just tied to the market average. And then so the performance of a professional, they might beat the market some years, but do they really beat the market on average over like 30 years until your retirement? You know, if they're taking more risky investments, they might have some more ups and downs. Again, often a question that is asked in terms of is it is it really worthwhile, you know, for the professional or to just put your money in index funds or something like that mutual funds. So more experienced investors are able to make decisions and investment choices on their own. So keep in mind that there is no right way to manage a portfolio, but investors should behave rationally by choosing their own research using facts and data to back up decisions by attempting to reduce risk and maintain sufficient liquidity. So we want to have enough money that we could do what we need to do. We need to be able to pull enough money out to do that. We want to try to get our growth on the funds of of course and try to get a return on them. Special consideration, risk is a huge component of an investment strategy. Some individuals have a high tolerance for risk while others investors are risk averse. Here are a few common risk related rules. So when we think about this concept of risk, again, if you if you talk to people like an investor, you might see some more aggressive investors, which would say that if you're low risk tolerant, for example, like you're weak or something, you're inferior or something like that. But that's not necessarily the case because if you talk to some people that are that are on the long game that are that are looking for investments over the long run. And you talk about these these items or these concepts like a black swan event or something like that. Then they they're actually quite argumentative on on that side of things too. So don't let someone basically convince you that you need to be hyper hyper aggressive or hyper hyper risk averse. For example, you got to you got to do your own research and try to figure out what's a suitable place for you. Given the fact of where you are in your life, where's the goal that you're going for and what's the time horizon to get there. So investors should only should only risk what they can afford. So riskier investments carry the potential for higher returns. So notice that that that correlation isn't always the case, right? Because you could invest in something that is riskier that doesn't that doesn't have a higher return, right? But clearly, if you're looking for a higher return, then typically there's going to be more risk related to it. In other words, you could pick just a bad investment that has risk and has a low return, which just would be a bad investment. But if you're looking for a return that does have the potential for a higher return, then typically you're going to be weighing the risk against it. Investments that guarantee the preservation of capital also can guarantee a minimal return. For example, US Treasury bonds, bills and certificates of deposits are considered safe because they are backed by the credit of the United States. So it seems less and less safe, but yeah, those are huge, safe kind of areas. And notice that prior to this presentation, the interest rates have been quite low. So a lot of people when they look at Treasury bills and the CDs, for example, they say, man, I'm not making anything on those. And a lot of people kind of have been shifting to equities, which were, which, you know, have the potential for the higher returns. But obviously, if we get into a point where we have a whole lot of inflation, the interest rates on things like CDs and Treasury bonds and stuff will go up. And if we get into, if there's a downturn in the market, the idea is that you want to have some diversification so that when you're sitting, when your money's sitting and things like CDs and stuff, you may not even be making the interest to cover the inflation. But if there's a downturn on equities, then you've got the kind of the hedge, right? You've got, you're trying to hedge yourself. So that would be towards the concept of diversification, lowering the risk, right? So however, these investments provide a low return on investment. Once the cost of inflation and taxes have been included in the return on income equation, there may be a little growth in the investment, along with risk, investors should also consider changing their investment strategies over time. For instance, a young investor saving for retirement may want to alter their investment strategy when they get older, shifting their choices from riskier investments to safer options. So typically, riskier investments often being in equities and like stocks, for example, mutual funds, for example. And those are typically good over a longer horizon, time horizon, as you get closer to when you're going to pull the money out, retirement. Then if the market dropped right then, that would be a problem. If you hit recession and the market just dumps right before you need the money, and you don't have 30 years to grow back up again, that's a problem. If it drops right before or and you still have 30 years going forward, then maybe you most likely hopefully have the time for it to come back up. So types of investment strategies. Investment strategies range from conservative plans to highly aggressive ones. Conservative investment plans employ safe investments that come with low risks and provide stable returns. Highly aggressive ones are those that involve risky investments such as stocks, options and junk bonds with the goal of generating maximum returns. Obviously with the maximum returns comes the risk that will be involved with it. And again, notice that as we see a market that is doing either good for a long period of time or is bad for a long period of time, people tend to think that that's the new norm and you'll kind of tend to start shifting your assets towards whatever your current environment is. If it's good, then you'll start shifting your assets towards more riskier investments and you'll think you're a genius until the market drops. Just dumps one time because it's been possibly artificially up or the inverse can happen. If it's been down for a long time, everybody might have their money in two conservative investments and not take it on the risk that might be appropriate to get better returns. So people who have a greater investment horizon tend to employ aggressive plans because they have a longer timeline while those who want to preserve capital are more likely to take a conservative approach. So if you have a long time to save, then the concept, the general wisdom would be that you're going to lean more towards the aggressive investments because the volatility that ups and downs should weigh out to the upside over a long frame of time. Many investors, so notice the strategy here isn't stock trading. It's not generally trying to figure out what's going to happen on the day to day. It's trying to say, hey, I think in the long run that it will be better off doing more riskier investments in stocks and bonds. If it's in the short run, I don't know when the down here time is going to hit, so I'm not going to take on the risk because I need the money at that point. So many investors buy low cost, diversified index funds. Now, index funds are great because they're tied. They basically don't require much management to manage the fund and you could get some diversification and they're trying to tie to an average to give people kind of averages of what the market is doing in certain sections and sectors. And so therefore you can buy an index fund at fairly low cost and then the question is, will a professional stock picker beat like an index fund or the average of the market and this kind of thing? And again, there's a lot of debate as to whether that's the case. So they use dollar cost averaging and reinvest dividends. The dollar cost averaging is an investment strategy where a fixed dollar amount of stock or a particular investment are acquired on a regular schedule, regardless of the cost or share price. So some experienced investors, though, select individual stocks and build a portfolio based on individual firm analysis with predictions on share price movements. Now notice that this approach is way more complex, right? Now, if you're an individual investor and you want to do that, then you might think of it more as like a hobby or something that you enjoy doing, possibly in addition to some other investment strategy you have. Or you might really dig into it and do your own strategies for stock picking. But notice that if you're looking at it from a day to day strategy, the idea of being able to beat professional investors, that's a bold claim to be able to do that. Because even then, there's questions as to whether or not they can actually beat the average, the index funds, right? So just keeping that in mind. So value investing versus growth investing. Some investors may choose strategies such as value and growth investing. And investor chooses stocks that look as though they trade for less than their intrinsic value, meaning the stock market is basically underestimating them. So the idea would then be, I think the underlying value is greater than what they're currently being traded for. Therefore, I'm going to invest in it, hoping that the market at some point in the future will recognize the true value of the stock increase in the stock price, making it a good investment. On the other hand, we have the growth investing involves investing capital in the stocks of junior companies that have the potential for earning growth. So in other words, if we invest in stocks that are on the growth phase, and if they continue to grow, then we would think that we would get a greater return than investing in companies that are already at the mature at the top. So in other words, when we're looking at risk of investment, we would think that investing in something like a CD or savings account or putting our money into bonds with the less risky oftentimes then putting money or depends on the type of bond, but less money than putting less risky than putting the money into stocks. When we think about putting money into stocks, you would think the kind of stock that would be less risky would be a big company that has plateaued their business cycle is up to the top. And now they're just marching along at more of a flat pace of steady growth, but not a big, big increase in growth, something like an Edison or something like that, or an Apple, for example, they already had their huge growth spurt. And now it might still be good to invest in them because you don't think that they're going to drop back down, but they're not going to basically have that huge spurt again of growth. You would think at that point in time, whereas if you were to invest in those companies like an Apple, when it was in its growth phase, then you would have been able to hit that huge growth period. Obviously, many companies that are in their growth phase may not make it, you know, as far up the ladder, and therefore you're taking on more risk for those types of companies as well. So example of investment strategy. A 25 year old who starts off their career and begins saving for retirement may consider riskier investments because they have more time to invest and more tolerant to risk. So you're younger, you might have more riskier investments because you have a longer time horizon. They can also afford to lose some money in the event that the market takes a dive because they still have time to earn more money. So if it goes down when you're 25 and you're saving until you're 65, then you should have some time for it to come back up again. This means they can invest in things like stocks and real estate. A 45 year old on the other hand doesn't have a lot of time to put money away for retirement and would be better off with a conservative plan. They may consider investing in things like bonds, government securities and other safe bets. Meanwhile, someone saving for a vacation or home won't have the same strategy as someone saving for retirement. They may be better off putting their money away in a savings account or a CD for short term goals like these.