Four Steps to Follow to Create a Better Investment Strategy

To achieve a set financial investment goal, it is no surprise that a lot of thought and planning needs to be done to provide a detailed strategy to be adopted for its successful implementation. This detailed investment strategy consists of a measurable and written plan that can be replicated to produce similar or even better results.

A mistake that many people make is to start investing without any solid investment strategy and without consideration for their overall investment objective. This ends up leading to frustration, failed investments, and the loss of money.

In this post, I’m going to show you how to create an investment strategy that best suits your investment objectives, to prevent or minimize investment frustration. By making use of the following guidelines, you will be able to create an investment strategy that will provide you with a consistent portfolio performance and eliminate investment decisions borne solely out of emotions. These guidelines will also prevent you from having a portfolio without an overall objective and direction.

How to Create an Investment Strategy:

If you want to know how to create an investment strategy, here are the four steps you should follow:

  1. Document your investment strategy

What you need to do first is to ensure that you document your process by writing down your investment strategy procedure. By describing it in written form, you are able to determine if you are doing the right thing and headed in the same direction as your objective dictates.

Writing down your investment strategy helps you to articulate your strategy and maintain discipline when you want to invest. You should ensure that your written investment strategy aligns with your long-term investment objectives as it provides you with something to go back to if at all there is any cause for commotion. In times like that, a written strategy provides you with a logical and well thought out plan that you can rely on instead of making emotional decisions.

You will definitely find it handy when plans and long-term objectives change because it gives you a document to review instead of just making mental changes which you are prone to forget.

Professional investors can make use of written investment strategies to help their clients understand the investment process that they are making use of and this can help to increase client retention, reduce the number of questions from clients, and increase the amount of trust they have for you.

  1. Have an underlying belief for your strategies

You should have an understanding and reasons for why you decide to go in a direction or make a particular investment. We can call these your beliefs – why investments become undervalued or overvalued, if investment markets are efficient, and how to exploit them. You need to know what your competitive advantage is and make use of it to provide yourself with a good strategy that you can execute profitably for the long-term. To develop beliefs and have solid reasons behind the decisions you take, you could develop yourself by investing in a school degree or an online course to provide you with special industry knowledge, or purchase a subscription for a rare research that not many investors have access to.

Your investment strategy should not leave out guidelines for selling and buying investments and it should be flexible for cases whereby your strategy is being used by other investors and is probably no longer as profitable.

If you believe that investment markets are completely efficient and no investor has a competitive advantage over others, then your strategy should be focused on minimizing costs of transactions and taxes.

  1. Ensure you have a resilient strategy

Another step on how to create an investment strategy is that it should perform well in all market environments and should be created in a way that allows a proper analysis of the strategy’s weaknesses and strengths. It helps you understand where your strategy performs well and where it does not, but you should note that with economic cycles and market trends, even good investment strategies are subject to periods of good and bad performance.

When you are able to determine the weaknesses of your strategy, you can then make use of other strategies that can strengthen yours. One way of complimenting your strategy is by mixing both growth and value investing strategies.

  1. Measure the effectiveness of your strategy

By measuring your investment strategy, you understand it better and are able to improve the parts that need improvement. Your benchmark should be aligned with your long-term investment objective and investment strategy.

Two common kinds of investment benchmarks are absolute and relative benchmarks while more sophisticated measures of return are the Sharpe Ratio and the Treynor Ratio.

Conclusively, I hope that these guidelines have helped you understand how to create an investment strategy that is resilient, measurable, backed by an underlying belief, and well documented. A well prepared strategy will definitely provide you with consistent long-term positive results.


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