If you want to avoid buying high and selling low, you need an investment strategy. Thankfully, the best investment strategy is simple and anyone can do it. Here’s how to develop your investment strategy.
Invest like Warren Buffet
A legendary “Warren anecdote” occurred during a TV interview. The journalist asked him what his favorite holding period for an investment was.
Mr. Buffet famously replied “Forever.”
Why buy and hold works
If it’s good enough for the most successful investor of all time, then it’s good enough for me.
The reason buy and hold works so well is that it removes the emotions from our investment decisions.
If we unwaveringly adhere to our investment principle above all else, it grants us calm in the storm of market downturns and world events.
It protects us from our own emotions and ensures our fear of losing and FOMO doesn’t lead to a lifetime of buying high and selling low.
What should you buy and hold?
Let’s start with the bare bones. A low-cost, tax-efficient ETF portfolio is the foundation for your long-term, “serious” money.
It will provide more than enough diversification and you won’t pay any more to Uncle Sam or financial institutions than you have to.
What combination of ETF’s should we purchase though?
Your breaking point determines your portfolio allocation
A buy and hold strategy is simple, but it’s not easy.
When we are in the depths of a financial crisis or pandemic or housing bubble our emotions take over.
There will be a point where we seriously rethink our buy and hold strategy.
“It’s different this time,” we tell ourselves.
We all have a breaking point where that kind of thinking combined with paper losses results in just too much pain.
And that’s when we deviate from our “buy and hold” investment principle and do the worst thing you can do in a downturn – SELL.
The key to successfully executing a buy and hold strategy is figuring out where your breaking point is.
How to figure out your breaking point
In finance-ese your breaking point is called your “risk tolerance”.
Google “risk tolerance questionnaire” and you’ll find do-it-yourself options. These are fine and can point you in the right direction, but it’s a little like using WebMD instead of a doctor.
As financial professionals, we prefer to use a “professional grade” questionnaire. You can try ours out here.
Match your risk tolerance to your portfolio allocation
The risk tolerance questionnaire will produce a risk profile. Think of it like taking a personality test, but for investing.
Your result will range somewhere between conservative to aggressive and then you know how to invest.
If you’re a more of a risk-taker, then an aggressive portfolio probably makes sense. The rollercoaster ride will be real, but you’ll get a higher return over time.
If you’re more conservative, then a conservative portfolio makes sense. The merry-go-round won’t produce the highest returns, but you’ll stay on the ride which is the important part.
How we can help
We use Riskalyze to determine our members’ risk tolerance.
Instead of a wishy-washy qualitative spectrum of conservative to aggressive, it produces a “risk number” which quantifies your risk tolerance.
We then match our member’s risk number with the risk number of one of our portfolio models.
And 82 risk number matches up with our aggressive portfolio model which scores an 80 itself.
A 36 risk number matches up with our 30 risk number conservative model.
You get the drift.
If your curious how your current portfolio matches up with your risk number, click here. First, you’ll take your risk assessment, then you can plug in your investment portfolio.
The numbers should be close.
If they’re not, then your out of whack and need to make some adjustments. We can help with that. So call us.
It’s literally our job to help people invest according to their risk tolerance.
