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What’s your investment strategy?
It seems like a simple enough question, and it’s important that you are able to articulate the answer.
Here are some ways you can think about your approach.
- Your investment strategy can be thought of as the blueprint that sits behind your investing decisions
- Your investment objective should consider factors such as the level of income or capital growth you’re seeking to achieve, and for what purpose
- In developing your strategy it’s also important to consider your financial circumstances, and take into account factors including timeframe, investment goals, and your portfolio construction preferences
You can draw a broad distinction between a long-term approach, in which you make investments you intend to hold for a period of years (sometimes referred to as ‘buy and hold’), and a shorter-term approach that is more about making tactical investment decisions to take advantage of short-term opportunities that present themselves.
Long-term investors, such as the legendary Warren Buffett, try to identify companies they think are undervalued, and which offer the prospect of good returns over the long term. They commit funds to these investments, expecting to reap the rewards over a period of years.
By contrast, a shorter-term investor might seek out opportunities offered, for example, by the Covid-19 crisis. In this approach, the investor might think, for example, that the fall in aviation stocks in the first two months of the pandemic was overdone, and invest in an aviation company hoping for a rebound over a period of a few months, with no intention of maintaining the investment beyond this point.
There’s no single ‘right’ way to go, and many investors choose to combine these approaches, constructing the bulk of their portfolio from investments they believe will do long well over the long term, but also keeping funds in reserve to take advantage of short-term opportunities.
It’s important to be able to articulate your investment goals, as these will largely direct your strategy.
Are you looking for growth, income, or a combination of the two?
Banking stocks, for example, are often favoured by income investors for the high dividends they historically have paid – although as we have seen in recent weeks, there is no guarantee around dividends, with several banks either reducing or cancelling their dividends.
Investors looking for growth, on the other hand, are likely to invest more of their portfolio in companies that tend to use their profits to grow their business, rather than paying those profits out in dividends.
Technology stocks, for example, typically retain most of their profits to reinvest in their business, and their returns tend to be more in the form of growth than income.
ETFs can be a good way to gain exposure to either growth or income investments, as they offer diversified exposure, for example to a portfolio of equities, bonds or hybrids, reducing the risk of a specific investment not generating the income or growth expected.
For example, rather than picking a single Australian technology stock, a growth-orientated investor might choose to invest in the BetaShares S&P/ASX Australian Technology ETF, which provides exposure to a diversified portfolio of Australia’s leading ASX-listed technology companies in a single trade.
Conventional investing wisdom is that younger investors should focus more heavily on growth, as they have a long investing timeframe and can more easily tolerate the volatility that growth stocks typically entail, while older investors such as retirees generally are advised to focus more on income.
The balance between growth investments and income investments, which are generally thought of as ‘defensive’, is likely to change as you grow older, and your financial circumstances changes.
One of the most important elements of your investment strategy is how you construct your portfolio – this is partly dependent on the considerations of time and goals outlined above.
One popular approach is the ‘core/satellite’ strategy.
In this approach, the core or the foundation of your portfolio typically contains a number of investments that give you broad exposure to a range of asset classes. Your core or foundation might include funds that give you exposure to:
- Australian equities
- international equities
- fixed income
- commodities, such as gold, and
ETFs are a great way to do this, as they typically offer diversified exposure at low cost. For example, the BetaShares Australia 200 ETF (ASX: A200) provides exposure to the 200 largest companies on the ASX at a management cost of just 0.07% p.a.1
Your core could also include:
Consider asset allocation in portfolio construction
An important consideration in constructing the core of your portfolio is asset allocation.
Many studies have been done that indicate that how you allocate your money across the major asset classes (equities, fixed income, cash, property and commodities) is the primary driver of your returns.
Asset allocation justifies its own article, but in summary, having a well-diversified portfolio means having your investments spread across different asset classes whose performance is not highly correlated with one another.
The satellite component of your portfolio comprises investments you might make to try and generate extra returns.
This could include investments to take advantage of short-term opportunities, or more focused exposures than the broad exposures that make up the core of your portfolio.
To continue learning about ETFs, portfolio construction and investment strategies, visit the Education Centre.
1. Other fees and costs, such as transactional costs, may apply. Refer to the PDS for more information.