How to Build a Successful Investment Strategy for the New Year

By George Leong

Another year is soon to draw to an end. In my final commentary prior to the holiday break, I’m going to talk about something that is often not considered by investors when formulating their investment strategy.

But first, let me talk about my dad. He’s in his early 80s and is the most risk-averse investor I have met. He will invest in bonds, regardless of how they are doing. In high-yielding or low-yielding periods (which we are currently in), he will invest in the safety of bonds and squeeze out any last drop of interest. Yet while his investment strategy has always been status quo, this is not the way it should be. Let me explain.

Your asset portfolio should combine the right blend of equities and bonds as an investment strategy. But you need to be careful in your allocation. Too much in equities, and you’re vulnerable to downside risk; albeit, stacking your capital in stocks over the past four years would’ve paid off. Concurrently, if you’re like my dad and hold too much in bonds, then you miss out on some strong gains.

What you need to do for a well-planned investment strategy is consider the key variables, such as asset allocation, diversification, and small-cap stocks, to add potential return.

In my view, you need to be aware of exactly how much you have slotted in equities and bonds. This is also known as asset allocation, which is key to any prudent investment strategy.

By asset allocation, I am referring to how your investable assets are divided up amongst the three major asset classes: cash, bonds, and equities.

The blend is dependent on the investment climate, your situation (i.e. where you’re at in your work life), and your age. Changes in any of these three areas will mean you need to change your allocations and investment strategy.

The more risk-averse investors, or those near retirement age, may want to have a higher amount in bonds/cash, steering clear of too much equity, which makes for a practical investment strategy. On the other hand, risk-tolerant or younger investors may want to take a more aggressive approach and maintain a higher mix of equities in conjunction with less bonds/cash as part of their investment strategy.

A simple rule that I found is more straightforward is to evaluate the weighting of the bond portion as a percentage of your total portfolio by using your age.

If you are 30 years old, a prudent investment strategy would be to have about 30% of your assets in bonds/cash and up to 70% in equities. The cash portion allows you to take advantage of stock market weakness to accumulate additional positions.

Now, say you are 50 years old. At this point, you may want a more conservative approach, with as much as 50% in bonds and cash. Of course, you can increase your equities exposure depending on your situation and financial resources.

Yet as you approach 65, this is the time when you are thinking of retirement, so you may look to start dumping some of your more risky stocks and holding onto the blue-chip dividend paying stocks in a capital preservation investment strategy, instead.

Of course, this formula should be used as a guideline; it’s not meant to be conclusive.

The risk level of the equities portion of your portfolio is also dependent on your willingness for risk and your age.

Let’s say you tend to get jittery and sweat profusely when the stock market gyrates. In this case, you may want to focus on blue chips and big-cap stocks. If you love the higher expected returns and are willing to take on added risk, then the addition of more small-cap stocks would make sense as an investment strategy.

At the end of the day, the key is to monitor your portfolio and make sure your investments match your risk tolerance and the other factors I discussed above.

This article How to Build a Successful Investment Strategy for the New Year was originally published at Daily Gains Letter