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Selecting an Investment Strategy

When asking a medical professional what their investment strategy is they might reply that they invest in their 401k or IRA. Those are investment vehicles or retirement plan accounts but they aren’t an investment strategy on their own.

I’m not sure I’ve ever been asked what my investment strategy is by anyone other than my financial advisor. It’s something worth thinking about and selecting.


Investment Strategy Types

From my research I have found the following investment strategy styles though I am sure there are many more:

  • passive indexing
  • momentum trading
  • long-term investing
  • dividend investing
  • value investing
  • market timing
  • dollar cost averaging
  • angel investing
  • bond investing
  • CD laddering
  • commodities
  • currency trading
  • real estate
  • note lending

I have dabbled in a few of these and have friends who are focusing on others. The desire for a particular risk-return profile often motivates an investor to select one over the other.

Despite this long list of investment strategies, most investors don’t have an investment strategy. They are doing something at the moment but are either looking for alternative investments or will jump ship if something appears more appealing.

Bouncing in and out of investments costs the investor a lot of profits. Brokerages and financial advisors continue to earn money but the individual investor loses out majorly.

Even worse, choosing an investment strategy for the sole reason of returns and ignoring one’s risk profile will undoubtedly lead to bailing out once shit hits the fan.


Adding Value To Your Investment Strategy

There are many ways to improve your investment strategy. One of my tactics is to curb behavioral factors and employ a financial advisor. Vanguard reports up to a 3% higher return for clients who use an appropriate financial advisor.

Other strategies that can add value to our investing are: to diversify, rebalance an asset allocation when appropriate, curbing fund expense ratios, and optimizing spending strategies from a particular portfolio.

Taxes are a big deal and affect the ability for an investment portfolio to grow successfully. Though taxes aren’t an investment strategy (fuck, I guess they are), they have to be considered when coming up with an individual, ideal investment strategy.

Hedge funds might have amazing returns but the fees charged often eat into those returns significantly. Enough so that a passive index fund investment strategy often performs on par.


Investment Policy Statement

I wrote my first investment policy statement in 2012 and I recommend that every medical professional write their own.

In it I outline the manner in which I will invest, though I don’t outline a particular investing strategy. My risk-return profile might change down the road and I may choose to change my investment strategy accordingly.


Instead of specifying a particular investment strategy, I have some words in my investment policy statement which summarizes my risk-return profile.

My overall risk tolerance is unlikely to change. However, as I get older or if my income streams fluctuate, I may be willing to decrease my portfolio risk and accept lower portfolio returns.


Changing Investing Strategy

It’s unhealthy to change your investing strategy constantly. Even worse if you change it based on market conditions, the latest and hottest investment option, or greed.

For the sake of risk control, you might change your investing strategy from a 100% equities indexing to a mostly bond and CD portfolio. Or, if you are eligible to withdraw from your cash balance plan, you might increase your equities holdings.

From what I have learned the best reason to change your investing strategy is to change the ratio of risk and return. You may want a higher return and are willing to take on more risk. Or you are getting more uneasy with higher risk and would be okay with a lower return.

Curbing investment losses is a big driver for some investors to want to change investing strategies. Again, here it’s best to determine our risk profile and our return desires before making a sheepish change.


Retirement Accounts

In a 401k you have the option of investing in index funds, active mutual funds, individual stocks, bonds, money markets, and a few other limited options.

If you want to select a more exotic investment strategy then you might have to venture into your IRA. There, you can create a self-directed IRA which can hold non-traditional investments such as real estate, precious metal, or peer-to-peer lending.

For most healthcare professionals a mix of bond and stock index funds seems to be the best option to hold in retirement accounts. With more investing experience each investor will eventually come up with their own ideal investment strategy.

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