Before choosing your investments, it’s important to identify the key factors that shape your investment strategy, such as your investment timeline and your tolerance for risk. Once you understand these, you can build short-term and long-term investment strategies that work together and move you closer to your goals.
What Are Long-Term Investment Strategies?
Long-term investment strategies include the tactics and types of investments used to reach a goal that is many years away. Common long-term goals include retirement and saving for college.
What Are Short-Term Investment Strategies?
Short-term investment strategies include tactics and investment types aimed at goals with a timeline of three years or less. Common short-term goals include saving for a vacation, a wedding, or buying a vehicle.
Considerations for Forming Investment Strategies
There are several general factors to keep in mind when building an investment strategy. These include your timeline, risk tolerance, risk capacity, expected rate of return, taxes, and whether you plan to invest on your own or work with a professional.
Timeline to Invest
Your investment timeline is the amount of time between now and when you plan to start withdrawing money from your account. If you have many years before retirement, you are generally considered a long-term investor.
If your timeline is three years or less, you are considered a short-term investor. A timeline of four to seven years is often seen as intermediate. Long-term investors may be able to take on more risk since they have more time to recover from market downturns. Short-term investors may want to avoid more volatile investments, such as certain stocks or stock mutual funds.
Risk Tolerance
Risk tolerance refers to how much market fluctuation you are willing to accept. While long-term investors may be able to take on more risk, their investments should still match their comfort level.
For example, a portfolio made up mostly of stocks may fit a long-term investor with a high tolerance for risk. Adding bonds may be a better fit for someone with a lower tolerance for risk.
Risk Capacity
Risk capacity is your ability to handle short-term declines in your investment accounts. For example, investors who have already exceeded their savings goals or do not expect to need withdrawals soon may have a higher risk capacity. Those who could fall short of their goals during a market downturn may have a lower risk capacity.
Desired Rate of Return
There is a clear link between risk and return. In general, higher returns often come with higher risk. Some stocks carry more market risk and have historically produced higher returns than bonds, which tend to have lower risk.1
Taxes
Taxes can play a role in how you choose your investments. You may want to think about your income tax rate or ways to reduce taxes when building your strategy.
For example, if you are saving for retirement, you might choose a tax-deferred account like an IRA. If you invest through a taxable account, you may want to consider tax-efficient options such as index funds, ETFs, or municipal bond funds. Each account type and investment product has its own features and rules, so it is important to understand them before investing.
Do It Yourself or Work With a Professional?
Your investment strategy should match your personal goals and comfort with risk. If you feel confident in your knowledge, you may choose to manage your investments on your own. However, working with a registered representative can help you choose investments and build a strategy that fits your needs.
Preparing to Move Forward With an Investment Strategy
Building an investment strategy depends on several factors, including your timeline, risk tolerance, and expected rate of return. Once you define your goals and comfort with risk, you can decide which types of investments to include. Because investment strategies vary from person to person, working with a registered representative can provide guidance based on your situation.
Sources
- Investment portfolios: asset allocation models. https://investor.vanguard.com/investor-resources-education/education/model-portfolio-allocation.
