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Investment checklist: Developing an investment strategy

19 September 2017

Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

No matter what stage of investing you are at, it’s important to have a strategy that matches your goals and personal needs and to keep checking that it’s working for you.

Here’s a checklist of issues and questions to help you along your investment journey:

Your destination:

Are you clear on why you want to invest and what you want to achieve? For example, do you want to accumulate money to buy a car? Or to put down for a deposit on a home? Or for a better retirement? Without setting a clear destination for yourself, you could just end up going around in circles or taking the wrong detours.

Your resources:

What is your current financial position? Have you done a financial audit to assess what resources you have for your investment journey? What assets can you use? How much of your income can you spare for investments? What expenses can you eliminate so you can gain more money to invest? Separately, do you have some money set aside for an emergency or rainy day? You don’t want to be forced to sell an investment at the wrong time because something has gone wrong.

Your timeframe:

It’s important to set a realistic timeframe within which you hope to achieve your goals, otherwise you may never get there. Knowing your timeframe will also be important when choosing the type of asset classes you invest in. For example, cash in the bank is a safer option if you only have a year or so to invest while investments in shares are wiser if you have over seven years to achieve your goals. This is because you may need more time to ride the ups and downs of the share market.

Your risk tolerance:

What kind of investments will keep you up at night? Everyone is different and you need to ensure that the way you invest your money is right for you. In assessing your risk tolerance, consider how you would react if the value of your investments plummeted overnight. If this would cause you a lot of distress, your risk tolerance may be low. If you are unlikely to be too concerned because you know the market will go up again or if the fall will encourage you to start looking for bargain buys, you are likely to be more comfortable with a higher level of investment risk.

Understanding your risk tolerance will help you decide how much you are prepared to risk of your money in order to make higher returns. It may also guide you in how you mix or diversify your different investments to reduce risks.

Your level of knowledge:

How much do you know about investing? How can you improve this knowledge? Who can you ask for advice? Should you consider speaking to a financial planner?

Your strategy:

Once you understand all of the above, you can start developing your plan of attack or investment strategy. Without a strategy, you may just be throwing darts blindly at the market. As part of your strategy you need to work out how you intend to invest – for example, will you invest yourself, use managed funds or a financial planner? What types of assets are you going to invest in, given your time frame and risk tolerance? That is, will you invest in fixed interest, shares or property, or a mix of these? How will you diversify your investments and spread your risks? When and why will you sell your investments?

Stick to your strategy:

From time to time, the share and property markets may seem like a rollercoaster ride. There may be sharp ups and downs. The ups are easier to ride, but you need to remain calm during the downs. In the past, markets have always risen again, even if this has taken some time. Don’t panic and certainly don’t start bailing out of your investments at a loss. Stick to your game plan. Over the long-term, a good strategy is likely to pay off.

Do regular reviews:

Review your investment plan regularly to ensure it continues to work for you and still meets your needs, especially if your circumstances or goals have changed. Is your strategy still performing or can improvements be made? Has there been a change in the economy or the world political landscape that may cause you to alter your plan? Do you need to rebalance your portfolio if one asset class has grown much faster than another? Have there been any major changes – for example, in the federal budget – that call for changes your investment plan? Should you review it with a CERTIFIED FINANCIAL PLANNER® to ensure it is the best one for you?