Define Your Investment Strategy for Your Portfolio

After you define your goals and figure out how much money you need, the next step is to work on an investment strategy that will make it happen. An investment strategy is basically a plan of attack that guides your decisions based on your goals, risk tolerance, and future needs for capital. Some keys to making a sound investment strategy:

• Start now. Seriously. Stop putting it off.
• Take advantage of the power of compounding (not sure what that is? Learn more at Teaching Financial Literacy).
• Think twice before investing in anything with high costs/fees – these can have a surprisingly large effect on your bottom line (not in a good way). See how here: Pay Attention to Your Fund’s Expense Ratio.
• Diversify your investments.

A little more about diversification: One of the best ways to meet your financial goals is by putting your money in a variety of investments – known as diversification – so that you can balance risk and return. This is the proverbial “don’t put all your eggs in one basket” idea: If you invest all your money in one stock, for example, what happens when that company goes belly-up?  

Ideally, you should diversify within asset classes – for example, by choosing an index fund that covers a chunk of the market instead of just one or two stocks – and across asset classes, by investing a percentage of your savings in each of the asset classes (stocks, bonds and cash).

Of course, the more you know about your investment options, the better decisions you can make. In this chapter, we’ll take a look at some of the retirement and tax-advantaged accounts out there that you might incorporate into your investment strategy. We’ll look at specific investments – such as stocks and exchange traded funds (ETFs) – in the next chapter.