How to Build Smart Investment Strategies

If you’re new to investing, you’re likely learning that there are many different ways to grow your money. From what funds to invest in to how much risk to carry, there are many decisions to make. And you worked hard for your money; if you’re going to invest it, you want to invest it in the best way possible. 

There really is no one investment strategy or approach that will work for every single person in every situation. What’s best for you will depend on your unique goals, timeline and risk tolerance. Being smart with your investment approach can help maximize potential return while minimizing risk. 

Below, we take a closer look at exactly what smart investing means. We also offer six strategies you can incorporate into your investment approach to help maximize returns. 

What is smart investing? 

Smart investing simply means that your investment decisions are backed by a strategy that is tailored to your specific life situation. A smart investment approach will typically be built around these six characteristics: 

1. Smart investment strategies are based on your goals 

What do you want to do with the money that you’re investing? It may seem like a simple question, but the answer is important because it will help to determine when the money is needed and, ultimately, your approach. 

For example, are you investing with the goal of buying a home five years from now? Or are you investing with retirement 25 years from now in mind? 

If you’re planning to use the money soon, a smart investing approach would probably recommend that you be more conservative so your investments don’t drop in value right before you need them. But if you have more time before you need the money, a smart investing approach might recommend that you be more aggressive in your asset allocation, knowing that you could ride out a downturn if necessary. 

2. Smart investment strategies include calculated risks 

All investments, even “safer” investments, carry a certain level of risk. When we talk about investment risk, we’re actually talking about different kinds of risk—including market risk, interest rate risk, credit risk, inflation risk, liquidity risk and more. 

The simple truth is that risk is an inherent part of investing, and while it can sometimes be difficult to stomach, risk is what offers the potential for growth. The goal of smart investing isn’t to minimize risk at all costs but instead to optimize risk so that it aligns with your financial goals, timeline and tolerance. 

3. Smart investment strategies are diversified 

When investing, you never want to put all your capital into one single asset class or asset type. That’s because from one year to the next, you never know which type of investment will do well. Concentrating your portfolio on a single (or small number of) bets could increase your risk of underperformance.  

A smart investing approach seeks to establish a diversified portfolio that holds a variety of different asset types. At its most basic, this means a mix of stocks and bonds that aligns with your goals and risk tolerance. But it can also include other types of assets, like cash and cash equivalents, real estate, commodities and more. 

If you don’t have the time to evaluate the different investments necessary to build a diversified portfolio, then index funds, exchange-traded funds (ETFs) and mutual funds can provide a fairly easy and cost-effective way to achieve diversification. 

4. Smart investment strategies are flexible 

You never know when an unexpected investment opportunity might present itself. When those opportunities appear, it’s important that your strategy is flexible enough to empower you to take advantage of them. 

What this flexibility looks like, of course, will vary from person to person. For some, it might mean holding a certain percentage of your portfolio in cash that you can deploy when necessary. For others, it might mean a willingness to sell out of other positions to pursue the new opportunity. 

It’s also important to note that the macroeconomic picture can sometimes change on a dime—leading to major shifts in growth expectations, interest rates and inflation. Flexibility empowers you to adjust your approach based on these shifting realities. 

5. Smart investment strategies are fine-tuned regularly 

Investing is not a set-it-and-forget-it task. You need to adjust your strategy along the way to keep your investments aligned with your goals, time frame and tolerance for risk. 

Say, for example, your investment portfolio is composed of 60 percent equities and 40 percent fixed income—the classic 60/40 portfolio. If your stocks have a great year, your allocation to equities may suddenly end up growing to 70 percent of the value of your portfolio. The good news? You made money. The bad news? With 70 percent of your portfolio now in stocks, you may be taking on more risk than you’d like. In that case, you may want to consider rebalancing your portfolio back to a 60/40 alignment by selling some stocks. 

Many successful investors rebalance their portfolios systematically—every six months to a year. 

But you should also revisit your portfolio as your personal circumstances change over time. If you get married, have children or are nearing retirement, your investment time frame and risk tolerance will also likely change. Making sure your investment strategy evolves with you is key to helping you meet your goals—both now and in the future. 

6. Smart investment strategies don’t wait 

While you can and absolutely should take advantage of investment opportunities when they present themselves, that doesn’t mean you should wait for one before you begin putting your money to work. Timing the market by trying to get in at the absolute bottom is extremely difficult to do, especially over the long term. Even professional traders whose entire job is predicting how the market will move often get it wrong. 

A better strategy is to put your money to work as early as possible so that it has more time in the market to compound and grow. If you’re worried that you might be buying in at the top of a market, you might consider dollar-cost averaging as a way  to potentially reduce some of this risk (and volatility). 

You don’t have to build an investment strategy alone 

Building an investing strategy from scratch may sound complicated, but following the advice above can help set you up with healthy, long-term habits to reach your financial goals. 

If you’re still unsure about where to begin, your financial advisor can help you understand all your options and build a financial plan—and investment strategy—that aligns with who you are and what you want to achieve. 

All investments carry some level of risk, including loss of principal invested. No investment strategy can assure a profit and does not protect against loss in declining markets.