Investing has no hard and fast rules: your strategy will depend on perception and judgment, which means there’s more than one way to succeed.
Your personal goals will largely shape your investing strategy. Your ambitions, risk appetite, time horizon, and starting point will influence the type of assets you invest in, which positions you take, and how you construct your portfolio.
“There are a million different ways to make money. There's no one way that's correct and no one way that’s wrong. I think the most important thing is to marry your personal style and strengths with how you actually invest. If they conflict with each other, you're not going to have a good result.”
– Brent Johnson, CEO of Santiago Capital
If you want to build a sustainable investment plan, a holistic approach is likely the way to go. That means you should pay attention to each of your five capitals: financial, physical, intellectual, relational, and spiritual. See, investors who focus exclusively on their financial capital run the risk of making decisions that negatively affect other aspects of their life. Plus, your investing process is likely to suffer if you’re overtired and stressed out. On the other hand, building a generally healthy environment for yourself could positively impact your financial decisions.
As an investor, you’ll be bombarded with tons of information every day. It can be hard to know which stories you should pay attention to, and which tips will suit your investing style. So first, make sure you understand your key drivers and your portfolio’s biggest risks – and bear them in mind when you’re assessing new data. And second, properly evaluate each idea: learn the other side of the story, scrutinize any conflicts of interest from your source, and evaluate whether it fits into your existing strategy. After all, what’s right for one investor’s portfolio won’t necessarily be right for yours.
There are five common asset classes you should know about. You’ll see that they’re all driven by different factors, so including some of each in your portfolio could help diversify your risk.
Stocks: Also known as equities, stocks represent shares of companies. Put simply, buying a company’s stock gives you a right to its future cash flows. You’ll usually see stocks broken down by regions (like developed or emerging markets) and sectors (like technology, healthcare, or financials). Stocks have a high correlation with economic growth in general, and individual stocks tend to be driven by idiosyncratic factors like a firm’s sales, profitability, and cash generation.
Bonds: Bonds represent a portion of a loan, and are issued by governments, corporations, or individuals. They tend to be less risky than stocks, and their returns are mainly impacted by general trends like growth, inflation, and monetary policy. Bonds are also known as a form of “fixed income” because the bondholder receives interest payments over the life of the loan. They tend to be graded by their risks of default: the higher the risk, the higher the yield.
Commodities: These are tradable raw materials that are essential in the production of various goods and services. Most fall into one of four core categories: energy, agriculture, base metals, or precious metals. Commodity prices tend to rise with inflation, so they could help you hedge against the negative impact of inflation on your other investments. Besides that, their prices are driven by demand and supply dynamics, the US dollar, and global growth. China has been the biggest driver of global commodities over the last decade, so best keep an eye on the country’s activity.
Currencies: You’re already familiar with one of the biggest and most liquid assets available: cash. If you want to branch out from your home currency, you could choose foreign currencies that you expect to appreciate. Currencies are mainly impacted by relative interest rates, inflation, growth, and economic policies.
Digital assets: This upcoming asset class was made popular by the emergence of blockchain technology. It includes bitcoin and other cryptocurrencies, stablecoins, social tokens, and non-fungible tokens (NFTs) – all of which tend to have low correlation to asset classes like stocks and bonds. Their future success will depend on the degree of mainstream adoption, the business cycle, and project-specific blockchain adoption.
Your portfolio’s design will ultimately depend on your circumstances, like your stage of life, time horizon, liquidity needs, and risk appetite. If you’re single with few financial commitments, you can probably afford to take on more risk by, say, designating more of your portfolio to stocks or digital assets. If you’re close to retirement, you might want to keep some cash and pick investments that generate a steady stream of income, like bonds.
Risk management is key to a successful strategy. The first golden rule is to size your positions responsibly: start small and choose positions that you can scale up or cut down when you need. The second is to only ever invest what you can afford to lose, so take stock of your income streams, family needs, and other assets. And the third: diversify your portfolio – you never know what will happen. On a related note, be conscious of liquidity: trading more liquid assets would make it easier to exit if you need the cash.
You should always be conscious of the risks in your portfolio. And above all, be honest about your investment case: truly evaluate whether a trade or investment is adding to or subtracting from your portfolio – and your life as a whole.
“I think what's important is to always take a step back, try to understand the big picture, and not be caught in the noise. That's number one. Number two is to only trade liquid instruments where you can get out when you feel it's right.”
– Pierre Andurand, CIO of Andurand Capital
To be a savvy investor, you need to know how to adapt. After all, markets can change from day to day, and historical trends don’t always repeat themselves. Case in point: stocks and bonds had been largely negatively correlated over the last two decades, but supercharged interest rates and inflation have meant both assets have suffered since the start of 2022. So while they were once used to hedge against each other, that strategy wouldn’t pan out well for you nowadays.
And remember, every investor’s experience is different, so try to not take the hard times personally. Plus, historical data and textbooks can only teach you so much about investing: experience is the best teacher.
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