Before you start investing you want to have an investment strategy in place. Here is a suggestion.
Pay of any debt first. This does not include mortgage (most of the time) and might not include student loans. That is up to you. More on debt here.
After you have paid off all debt, save for an emergency fund and for foreseeable expenses. If you rent a place, probably 3 months’ worth of expenses is enough. If you own a property, you might want to consider four to six months. Account for family member that rely on you as well. So with children maybe keep a higher emergency fund as well. Foreseeable expenses include new (used) cars, constructions, holidays etcetera. Everything you foresee spending money on that is not a ‘normal’ expense.
Have that all in place? High Five! Only money that is left after that is money set for investing.
If you just start out investing you can split all investments in two main categories, offensive and defensive. Defensive are the lower risk investments that also have lower yields. This includes bonds, ETF Bonds, savings account, gold, checking account and cash. A defensive investment strategy might be 75% bonds and 25% stocks. Defensive investing knows less volatility and makes more sense if you invest short term. The change of losing money when you need to sell is smaller.
Offensive is everything with a bit more risk and also a bigger change of higher yields. Here there is more risk involving with changes of higher yields. You can lose more as well. In this category for me are ETFs in stocks. Some asset managers say ETFs are defensive. In the market crash of march 2020 almost all ETFs crashed hard. It was temporary but it showed they are volatile. Average returns are about 8%. That is why I think ETFs are offensive. Because of the volatility your ETFs can be worth (a lot) less then what you bought them for temporarily. Only invest for the long run to make up for the short term losses.
Very offensive individual stocks, shorts, cryptocurrency, speeders or sprinters. It’s more like gabling and less like investing. I call this ‘play money’. This is for the fast, high gains and not to ‘set and forget’. If you are willing to put a lot of risk and a lot of time in to investigate the market, you can have a high return but also a big loss.
A rule of thumb I heard of is your age in percentage of bonds and the rest in stocks. So if you are 30 years old you put 30% in defensive investments and 70% in offensive. When you are 60 years old, 60% defensive and 40% offensive. The older you get the more defensive you get. This is because when you reach the age of retirement you want to get your money (partially) out. If the market is volatile you risk a lower yield when you are still investing offensive when you are older.
For the sake of this article I calculated how much in my portfolio is defensive, offensive and ‘play money’.
Jackson and Vladimir don’t care. At all.
Turns out I have 27,5% in defensive, 70% in offensive and 2,5% in play money. For this rule I’m pretty fine but for me that is a bit too defensive. Especially considering I have an emergency fund in place. F I count my emergency fund as a defensive asset, the ratio will be 38% defensive, 60% offensive and 2% play money. I will rebalance until it looks more like 10% defensive, 87,5% offensive and 2,5% play money. Rebalancing is balancing back the assets until you reach the strategy you choose for is restored. This rebalancing can be done different ways. I can sell some bonds and buy stocks until I reach the desired ratio or I put the next few months in stocks until I reach it. I’ll do the latter.
What’s your investment strategy?
Till next time,
I am not a Financial advisor nor am I YOUR financial advisor. I am not a trained financial professional. This blog is for entertainment purposes only.