With the current economic climate, there are many things to consider when it comes to investing, but one of the main things to understand is how investing, in general, can change over time and the why behind it. Investment strategies are the secret equation that some investors hold to, but even the best investors tend to change their equation when economic shifts cause an adjustment in the market. However, we are discussing the general reasons to change a strategy, and you can look at this either as an approach for an individual investor or as someone looking to assist with their clients.
Rules to Change an Investment Strategy
- Vicissitudes in Life – As an individual investor or a money manager, there are many things to consider when it comes to investing, mainly based on one’s current life situation. For example, an individual in their 20s will be investing differently than when they turn 50 and are approaching retirement. These types of life changes would create a reason to adjust one’s investment strategies. Other reasons behind this are based on an individual’s risk tolerance and how they can navigate through that once they understand the level that they would be able to step away from as far as living profits. One of the other avenues that would cause a life event to adjust one’s investment strategies would be through inheritance, resulting in large sums of money being dropped into an individual’s account. This is where higher risk tolerance is shown, allowing for more diversity in one’s strategy to either be more aggressive or more conservative depending on that individual’s future goals.
- Market Adjustments – While this is one of the more controversial discussions in the realm of finance, there is something to be said about adjusting during certain economic downfalls. For example, during the 2007 financial crisis, there were a lot of buying opportunities for investors, but they did show signs of high risk that would only adjust depending on the future legislation or regulations to address the issues that caused the 2007 financial crisis. While some would have suggested holding during this time, there were a lot of profits that were made by cutting losses to dip into less appetizing stocks for long-term future growth (REITs). While traditionally speaking, it is best to stick to a strategy and stay with it until a life event occurs, there are times in a market correction when an individual needs to analyze future growth and consider adjusting one strategy to produce high levels of profits based off of economic developments 1-5 years out.
- Taxable Divisions – This is a different approach to viewing one’s investments, but utilizing long-term holds versus short-term capital gains can help certain investors in situations limited to different financial growths. As an example, if an individual is on the fence about hitting a new level of a tax bracket by an amount that is reflective of a certain amount of a profit loss by holding a specific stock, there are strategies to sell off losing stocks to gain a lose towards one’s taxes when it comes to taxable income. A way to view this is if a loss of $10,000 on a $100,000 investment allows for dismissal of $12,000 owed, one could sell off for a loss to then gain an instant $90,000 liquid to reinvest while bringing down owed taxes to $2,000. While this requires a level of forecasting in terms of owed taxes, if an individual can be on top of their finances, they will be able to adjust directly to free up funds for future investment opportunities.
- Never Chase Returns – While this isn’t a direct adjustment to investment strategies, there is a lot to be said in regards to never chasing a return. Suppose an individual is looking to take a loss to free up funds for a potential stock showing momentum to be equivalent to a meme stock. In that case, this is a terrible approach to adjusting a strategy for the potential for significant short-term gains. For the most part, these strategies result in large amounts of lost funds with dying stock that are hard regarding recovering to record highs. In Laymen’s terms, this is buying high and selling low, and this strategy is what sets hobby traders from investors and should be understood before making any kind of investment. from investors and should be understood before making any kind of investment.
Suggested Investment Strategies
While we have discussed reasons to adjust investment strategies or why someone would consider adjusting, we want to make sure that you understand some positive strategies that have shown to work regardless of life changes and are easily able to be adjusted throughout one’s life.
- Value Investing – This is the simplest way to look at investing. This strategy is based on seeking stocks that are believed to be undervalued using metrics that can track a stock placement based on the industry in which they are placed and then selling with the price of the stock shows strong signs of growth. One of the metrics to look at is a price-earning ratio and how they change for a stock compared to the company’s industry.
- Growth Investing – This metric is based on the long-term holding of a stock that shows signs of growth regardless of the current price. The best way to look at this is if an individual is investing in Tesla that investor sees value where the company will keep growing, and ultimately the stock will grow with it. This is as simple as purchasing then forgetting until the company continues to grow and then selling based on a new opportunity.
- Momentum Investing – This strategy follows the reason to adjust one’s approach to investing, but it requires daily research in the market. This strategy is heavily developed using technical analysis to understand why a stock keeps winning and why one keeps losing. If an investor sees a winning stock, then they invest to ride the wave to high profits and then sell once they believe the high has been hit.
In conclusion, there are a lot of things to consider when it comes to adjusting one’s investment strategy, but regardless, investment strategies should be changed over time to benefit the investor for their wants and needs.