An investment strategy should be part of your overall financial plan. This will look different for everyone depending on how much you want to invest, how long you have to invest and how much risk you are willing to take on. There are several different paths you can consider when building your investment strategy.

Before you invest

Before you get started there are a few things you should make sure are part of your financial plan.

Establish your financial goals

Your individual financial goals should be the guidepost for your entire financial plan. Some might be saving for retirement, for their child’s education, or a big vacation. Whatever is on your list, make sure you are true to your values and share your goals with your financial planner so they can help you make those goals a reality.

Understand your risk tolerance and time horizon

The level of risk you choose to take in your portfolio will determine the long term returns of your investment. And the time you have to achieve your goal can inform what level of risk you might be comfortable with taking. However, some investors who have a low tolerance for risk might need to allow extra time to achieve their goals due to lower long-term returns from more conservative investments.

Either way, sometimes risk tolerance is best measured by the “sleep at night indicator”. If you have trouble sleeping because you’re thinking about the risk of your portfolio, you may be taking too much risk with your investments. Having a discussion with your financial advisor to adjust your financial goals is warranted.

Build emergency savings

Before investing for longer term goals, it is recommended you have around six months of living expenses in a liquid savings account that you can easily access for a rainy day.

Max out your employer-sponsored retirement plan

One of the first steps to take in saving for retirement is to contribute to your employer sponsored retirement plan. Most employers offer matching contributions for employees contributing to the plan. Make sure you’re contributing at least the minimum amount to ensure you are receiving the full match from your employer. Think of this as free money – it will contribute significantly to the long-term growth of your retirement savings.

After you are confident in these financial areas, you may be ready to explore your investment persona.

Investment personas

Set it and forget it

This might be an investor who has no interest in engaging in the day-to-day management of their portfolio. This type of investor might be looking at age or risk-based portfolios and/or working with an financial advisor to professionally manage their assets. Usually, investments are rebalanced over time, eliminating the need for the investor to make changes to the portfolio.

This path is focused on long-term asset allocation geared toward the investor’s time horizon and investment goals. Most likely, this investor is not actively watching their statements as the market goes through different cycles. Instead, they are focused on the long-term financial plan and allowing their money to grow over many years.

The do-it-yourselfer

This investment path is for the investor who likes to get their hands dirty. Maybe most of their portfolio is allocated according to their investment objectives and time horizon, but this investor likes to dabble by researching investments, buying and selling different holdings and making tactical changes to their portfolio based on their feelings about the market and economy.

This investor is comfortable capturing in-the-moment pricing of different investments and they are usually comfortable with a little more risk. This type of investor understands and doesn’t mind spending the extra time it takes to watch and analyze the market. This type of investor might engage a financial planner to help with their long-term planning, but usually like to manage their own investments.

Values champion

For some, investing according to their values is important. Environmental, social and corporate governance (ESG) investing allows investors to build portfolios that they feel make a positive impact and align with their specific values. Others might want to consider investing in what they know. For example, if Amazon boxes arrive on your porch every afternoon, you might want to buy their stock. Or, if you find yourself eating at Chipotle a few times a week, you can add Chipotle shares to your portfolio. For those who are experienced investors in this area, they may want to consider direct investments in their community. There could be a new small business that needs an investor or a community project that you want to support financially.

Understand your tax efficiency

When building a portfolio, asset location is equally important as asset allocation. Asset location describes the importance of using the appropriate investments inside of the appropriate accounts, based on tax treatment of that account. For example, an investor might choose to invest in income-producing investments (like dividend paying stocks) in their retirement account because they can defer paying taxes on those dividends for many years until they begin to take withdrawals to fund their retirement.

Conversely, an investor might choose to invest in growth-oriented investments and vehicles like tax-free municipal bonds in their taxable investment account in order to avoid having to pay taxes on dividends and other income each year. Maximizing the tax efficient management of your account can help enhance your after-tax returns and help bolster your investment growth over time.

Investing, especially for those just starting to invest, can be confusing and treacherous. Nobody likes to lose money investing, but it’s a very real possibility – especially for those with limited investment knowledge. It’s important to understand the assets you’re invested in, and to assure that your investments match up with your investment goals and risk tolerance.

Some investors, as described above, might be comfortable exploring new investment opportunities on their own. For others, working with an advisor to pursue new investment ideas for their portfolio is appropriate. But for all investors, understanding the basic principles above will create a foundation from which you can launch your investment journey. It is important to evaluate your investments and talk with your advisor about any major life events or investment changes you want to make at least once a year.

Interested in learning more about our Private Wealth Management division? With UMB, you have a guiding partner from financial advising and wealth building strategies, to retirement and legacy preservation plans.