Investing is personal.
That’s because everyone’s investment goals are individual to them. Hence, there is no ‘one size fits all’ answer to the question: What is the best investment strategy? But there is an investment strategy that’s the best one for you.
Here are some guiding principles that will help you to choose the best investment strategy.
Define your goals
The first thing to do when looking for an investment strategy is to define your investment goals. Outlining your goals means that you can develop a strategy that allows you to achieve them.
Some investment goals might include getting married, buying a house or a car, having children or planning for retirement. Each of these goals needs a different strategy and that’s because they have different time horizons.
Define your investment time horizon
Once you’ve defined a goal, you can think about how long it is going to take you to achieve it. For example, buying a car should take a short time. Retirement, on the other hand, might be decades away. So investment goals have different investment time horizons.
It’s important that your strategy matches your investment time horizon by being a suitable level of risk. The rule to remember is that investing for the long-term allows you to take on a little more risk; whereas for short-term investing, it is better to maintain a low-risk approach.
Define your level of risk
Now you have a goal (e.g. retirement) and a time horizon (e.g. 30 years), you should think about how different investment strategies have different levels of risk.
Remember, investment risk is the chance that you might lose money on an investment. We hope markets go up, but we know that, in reality, they can go down. So it’s important that we can weather the bad times when our portfolio is losing money. We do this by matching investments to our risk appetite.
Short term investments are more risky, as we don’t know if markets will go up or down in a short space of time. Hence, risk is high. In the long run, markets (should) grow so long term investments have a higher chance of making you money. A simple rule is that the longer you invest, the less likely you are to lose money too.
Keep your costs lows
An important part of selecting an investment strategy is choosing one with low costs. Even if you make the best investments, high costs can erode your gains.
An SEC study showed how a 20-year, $100,000 investment portfolio, with a fee of 1% grows by $30,000 less than a portfolio with a fee of 0.25%. So make sure that you know how much you are being charged. If your portfolio seems too expensive, choose a cheaper strategy.
At Sarwa, we justify every part of the fee that we charge. For example, we don’t charge trading commissions or exit fees. Find out more here to make sure you’re investing efficiently.
Passive versus active
When deciding a strategy, you should take into account whether the investments you’re choosing will be passive or active. The rise of passive investing has taken wealth management by storm. But you should consider whether it is the right approach for you.
Index funds and ETFs have outperformed many active investment strategies. To prove this point, in 2007, Warren Buffett bet an asset manager $1 million that a passively managed fund would outperform a collection of hedge funds over the next decade. Buffett won the bet by a distance, proving the worth of passive investment strategies, especially for investors who don’t want to spend all day tracking the stock market.
Passive funds also usually have lower fees than active funds. Passive investing is what we focus on at Sarwa. Here’s why we believe it works.
Invest according to your values
Your investments should reflect who you are as an individual, supporting what you believe in. For example, many funds and ETFs now use strategies that focus on socially responsible investing (SRIs). Also, if it matters to you, you should be looking to make shariah compliant investments that follow the Islamic principle of Halal.
Whatever it is that is most important and personal to you in your life, you should be able to find an investment strategy that matches your values.
How can Sarwa help you choose the right investment strategy for you?
Sarwa gives investors access to investments in a painless and affordable manner. Our approach draws upon the work of top investors and academics to create investment strategies that minimize portfolio risk, giving your money the greatest chance of growing over time. By investing with Sarwa, you’ll invest according to a strategy that has been designed for you.
It’s also important to remember that time is your ally and you the earlier you start the better. As the old saying goes, tall trees grow from small seeds, which is very true of investing. There is no reason why you can’t choose an investment strategy, start small and start as early as you can.
If you’d like to discuss which is the best investment strategy for you, get in touch to talk about any aspect of investing with one of our advisors.
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