How to build an investment strategy - Times Money Mentor (2024)

While the incomes of many Britons are being squeezed by the rising cost of living, if you are fortunate enough to have a little disposable income left each month – or find yourself in receipt of a lump sum of cash – what could you do with it?

Leaving the money in your current account, or even moving it to a savings account, could provide a safety net. But with inflation at 4%, the interest you earn might not be sufficient. So, what about investing your money instead?

There’s no doubt that investing has the potential to be an effective way to grow wealth and achieve long-term financial goals. However, starting out can seem overwhelming, with so many options for where to put your money and investment strategies you could take.

There is no one-size-fits-all approach here. People new to investing might want to consider their financial goals, how much risk they are willing to take and when they might need to withdraw the funds.

This article explores:

• How could you build an investment strategy?
• Where could you invest?
• Keeping investing simple

How could you build an investment strategy?

Regular investing

This approach involves consistently investing a fixed amount at regular intervals, regardless of market conditions. Using this strategy, investors are likely to buy more shares both when prices are low and prices are high.

Advantages: It allows for a low initial investment, promoting a disciplined approach. Plus, over time your funds will compound, smoothing out market fluctuations.

Disadvantages: It may lead to missed opportunities during periods of rapid market appreciation.

Lump-sum investing

This involves investing a significant amount of money in a single transaction, rather than spreading the investment out over time.

Advantages: It offers immediate market participation. This means there is potential for higher returns if the market performs well, and simplicity for those with a large chunk of capital to invest.

Disadvantages: There is the risk of buying at a market peak, causing short-term losses and perhaps leading to stress and anxiety. “Concentration risk” could also arise among investors when they place a large sum in a single asset or market segment, leaving them overexposed to how well that investment performs; this is the opposite approach to diversification.

Diversification

This involves spreading investments across different assets. Examples include shares, bonds, or industries and geographical locations to reduce risk and potentially increase returns. Whether you are investing regularly or putting in a lump sum, there are pros and cons to a diversified portfolio.

Advantages: Diversification helps to mitigate the impact of poor performance in one investment. It also provides exposure to various industries and sectors, and promotes a more stable portfolio.

Disadvantages: It may limit upside potential by spreading money more thinly across multiple assets, and it requires ongoing monitoring and potential additional costs for portfolio rebalancing.

Moving funds into lower-risk accounts or cash

As investors approach the fulfilment of their financial goals or anticipate the need for funds in the near future, they could consider moving their investments into lower-risk assets.

Advantages: This strategy aims to protect your investments against market downturns. So ideally you don’t want volatility when you’re about to withdrawing some of your money. It might also provide flexibility in terms of easy access to funds.

Disadvantages: Holding significant amounts in lower-risk assets or cash during times of market growth may result in missed investment gains. In addition, inflation will likely erode the purchasing power of funds.

Where could you invest?

Index fund investing

Index fund investing involves purchasing a diversified portfolio where the investment returns simply track the performance of a market index, such as the FTSE 100. This relatively low-cost “passive” investment strategy offers broad exposure to a market.

Advantages: It provides instant diversification, and allows investors to capture average market returns without the need for “active” stock selection by investment managers – and the higher fees that go with it.

Disadvantages:There is very limited potential for outperforming the market due to passive management and investors are exposed to downturns in the index being tracked.

Value investing

This entails identifying stocks that are undervalued by the market based on analysis. You may use concepts such as price-to-earnings ratios and book values to achieve your goal. Ultimately, the aim is to purchase these stocks at a bargain price and benefit from their potential appreciation over time.

Advantages: It could offer the opportunity to buy quality stocks at discounted prices. Therefore you could achieve significant returns if the market corrects its valuation.

Disadvantages: The timing of value investments can be challenging, as undervalued stocks may take time to appreciate, and there is a risk of misjudging the intrinsic value of a company.

Dividend investing

Dividend investing focuses on selecting stocks that consistently make payouts to investors. This strategy aims to generate a regular stream of income from the dividend payments and potential capital appreciation.

Advantages: It offers a potential income stream for those seeking regular cashflow, allowing them to benefit from companies’ profitability and shareholder-friendly policies.

Disadvantages: Companies may reduce or eliminate dividends. Reduced dividends leads to a loss of income, and dividend-focused portfolios may lack exposure to high-growth companies that reinvest profits back into the business.

Keeping investing simple

Investment app Wealthify, backed by leading financial services firm Aviva, can help remove some of the pain of investing.

The app provides a user-friendly interface that simplifies the investment process, making it accessible even for those with limited experience.

With its intuitive design and easy-to-navigate features, investors can conveniently manage their portfolios and track their progress in real time.

It also offers a range of diversified investment options. These include ready-made portfolios tailored to five risk profiles, making it suitable for a wide range of investors. This diversification could help mitigate risk and provide possibilities for growth.

Finally, the app provides transparency and control, allowing investors to set their financial goals, select their risk tolerance, and monitor the performance of their investments with ease.

Invest with Wealthify and you could get between £50 and £800 cashback

Wealthify makes it easier for anyone to invest. Open an account, choose a level of risk that’s right for you, then let the firm’s experts do all the hard work.

If you’ve always wanted to invest but have never known where to start, we’re working with digital investment platform, Wealthify, who make it easy for anyone to invest.

As a new customer, you could earn between £50 and £800 cashback when you invest a minimum of £1,000 in any one of their investment products. To be eligible you must start your transfer requests within six months of offer registration, and ensure all cash deposits are received within the same timeframe.

Offer registration ends 22/04/24. Cashback varies by deposit/transfer amount. With investing, your capital is at risk. Your tax treatment will depend on your individual circ*mstances and it may be subject to change in the future. Don’t forget to check the terms and conditions*.

Wealthify is authorised and regulated by the financial conduct authority.