Build Your Investment Strategy to Meet Your Goals

Establishing an investment strategy that meets your personality and your goals is relatively easy once you determine whether you want a conservative investment strategy or a moderate investment strategy. This requires two primary actions.

First, establish your personality and goals:

  • What kind of risk are you willing to accept? A few losses will always occur but are you willing to accept only minor losses or do you want to shoot for large gains that may results in more losses in the process?
  • How often do you want to trade? Are you willing to trade each week or would you prefer only once or twice a month or even less?
  • Are you willing to see your portfolio, your retirement account, or wealth account build very gradually over time or do you want to grow these fast?

Second, understand the strategy ingredients that make for conservative investments and moderate or aggressive investments:

  • Frequent trading, almost daily, is best suited for aggressive and in some cases moderate investments.
  • Setting sell stops that are low, like 1% to 3% will results in more frequent trading than sell stops that are a bit higher.
  • Trading a wide range of stocks versus ETFs or many mutual funds will generally produce more aggressive or moderate investment strategies.

Setting different rules or parameters in your retirement software or personal investments software can affect your results and define your investment strategy as either conservative, moderate or aggressive:

a) Ranking – setting sell rules based on the rank of a position (ticker symbol) in you group of potential positions. Ranking in the top 5% or 10% vs. the top 30% will produce more frequent trading and normally a more aggressive strategy.

b) Stops – setting the sell rules based on how much a position drops from its high point can also result in trading frequency, churning of your portfolio.

c) Hold rules – defining your strategy by saying you prefer to hold positions for no less than 10 days vs. 30 or 60 days sets up your strategy for aggressive vs. conservative.

d) Employing a Market Exit signal based on the equity curve of the performance of the stock markets can tell you when to pause or even cash out of the markets for a short or long time and by doing so preserve your money from losses. But setting this signal with a short evaluation period versus a long period can have a major effect: too long being bad because you won’t get a signal in time to avert major loss, but to short will have you again trading too frequently.

e) Period of Analysis – when you are analyzing your group of potential funds, ETFs or stocks the time period selected will also determine the type of investment strategy. Longer analysis periods will result in more conservative approaches while short periods, like 10 days, will be more aggressive and require more trading.

All these factors are not as intimidating as they may sound. The key to safe investing, to defining your investment strategy, is to understand that you are in control and that you can set these parameters to meet your personality and your objectives. Yes, you should back test to find the exact settings that meet your needs and reflect your desires in your investment software, but you can tailor the analysis testing to fall within your range of what is acceptable to you.