6. Create your Investment Strategy & Implement it – Start Investing

Introduction

Investing is the crucial next step in your financial freedom journey. It allows you to grow your wealth, beat inflation, and inch towards your financial goals. This chapter will guide you through creating a simple yet effective investment strategy and implementing it without being overwhelmed by too much information overload.

Why Investing

Wealth Accumulation: Investing helps your money grow over time, leveraging compounding returns to build wealth.

Beating Inflation: Investments typically offer returns that outpace inflation, preserving your purchasing power.

Achieving Financial Goals: Whether for retirement, buying a home, or funding education, investing can help you reach significant financial milestones.

Steps for Your Investment Strategy & Tactics to Invest

1. Define Your Investment Goals

These should be driven off of the high-level goals you set up for yourself in Chapter 2: Define Your Financial Freedom Goals. Clear goals help you choose the right investments and stay motivated.

Tips:

• Short-term goals: Saving for a vacation or a down payment (1-3 years).
• Medium-term goals: Buying a home or starting a business (3-7 years).
• Long-term goals: Retirement or education funds (7+ years).

2. Assess Your Risk Tolerance

Understanding your risk tolerance helps you choose investments that align with your comfort level.

Tips:

• Risk Tolerance Factors: Age, income, financial responsibilities, investment knowledge, and emotional tolerance for market fluctuations.
• Risk Tolerance Levels: Conservative (low risk), Moderate (balanced risk), Aggressive (high risk).

3. Choose Your Investment Vehicles

Different investment vehicles offer varying levels of risk, return, and accessibility.

Tips:

• Stocks: Ownership in companies with potential for high returns and high risk.
• Bonds: Loans to entities (government or corporations) with lower returns and lower risk.
• Mutual Funds: Pooled funds managed by professionals, offering diversification.
• ETFs (Exchange-Traded Funds): Similar to mutual funds but traded like stocks.
• REITs: Real estate investment trusts.
• Real Estate: Property investments providing income and potential appreciation.
• Other Assets: Gold, Commodities, cryptocurrencies, or peer-to-peer lending for additional diversification.

4. Open an Investment Account

You need a platform to buy and sell investments.

Tips:

• Brokerage Account: For stocks, bonds, ETFs, and mutual funds. Some of the popular ones are Fidelity, Charles Schwab, Vanguard, TD Ameritrade, ETrade, Interactive Brokers, Robinhood, M1 Finance, Public.com, Webull* etc.
• Retirement Accounts:
  • Employer-Sponsored Plans
    • 401(K): This is a employer-sponsored defined contribution plan. You contribute a portion of your paycheck before taxes, reducing your taxable income. Many employers offer matching contributions, essentially free money that boosts your retirement savings. There are contribution limits for how much you can save each year.
    • 403(b): Similar to a 401(k) but for employees of tax-exempt organizations like schools and non-profits. Contribution rules are generally similar to 401(k) plans.
    • SIMPLE IRA: This is a simplified version of a traditional IRA for small businesses with less than 100 employees. Employers can choose to make matching contributions.
  • Individual Retirement Accounts (IRAs)
    • Traditional IRA: Contributions are typically tax-deductible, reducing your taxable income for the year. Earnings grow tax-deferred until you withdraw them in retirement, which will be taxed as income. There are contribution limits per year.
    • Roth IRA: Contributions are made with after-tax dollars, so they are not tax-deductible. However, qualified withdrawals in retirement are generally tax-free. There are contribution limits per year.
  • Other Options
    • Solo 401(k): For self-employed individuals with no employees (except a spouse). Allows for both employer and employee contributions with higher limits than traditional IRAs.
    • SEP IRA: Another option for self-employed individuals or small businesses with few employees. Employers contribute to individual IRAs set up for each employee.
• Robo-Advisors: Automated platforms that create and manage a diversified portfolio for you.

5. Diversify Your Portfolio

Diversification spreads risk across different investments, reducing the impact of any single asset’s poor performance.

Tips:

• Asset Allocation: Allocate your investments among different asset classes based on your risk tolerance.
• Sector Diversification: Invest in various industries to avoid sector-specific risks.
• Geographical Diversification: Include international investments to spread geographical risk.

6. Start Small and Scale Up

Beginning with small investments helps you learn and build confidence without risking too much capital.

Tips:

• Minimum Investments: Many platforms allow you to start with a small amount.
• Micro-Investing Apps: Platforms like Acorns or Robinhood enable you to invest with spare change or small sums.

7. Create and Stick to an Investment Plan (Start Doing)

Consistent investing helps smooth out market volatility and takes advantage of compounding returns.

Tips:

• Dollar-Cost Averaging: Invest a fixed amount regularly, regardless of market conditions.
• Automated Investments: Set up automatic transfers to your investment accounts to ensure consistency.
• Reinvestment: Reinvest dividends and interests to maximize growth.

8. Monitor Your Investments

Regularly reviewing your portfolio ensures it stays aligned with your goals and risk tolerance.

Tips:

• Periodic Reviews: Check your portfolio’s performance monthly, quarterly or annually.
• Rebalancing: Adjust your asset allocation to maintain your desired risk level.
• Stay Informed: Keep up with market trends and news that might impact your investments.

9. Seek Professional Advice if Needed

Professional guidance can provide personalized strategies and help navigate complex investment decisions.

Tips:

• Follow the Tips from Chapter 1: Educate Yourself Financially → Seeking Professional Advice ****on getting help from Financial Advisors.

Practical Example of a Simple Investment Strategy

Step 1: Define Your Goal

• Goal: Save for retirement in 30 years.

Step 2: Assess Risk Tolerance

• Risk Tolerance: Moderate (willing to accept some risk for higher returns).

Step 3: Choose Investment Vehicles

• 60% in stocks (e.g., S&P 500 index fund).
• 20% in bonds (e.g., government or corporate bonds).
• 10% in real estate (e.g., REITs).
• 10% in international stocks (e.g., global equity fund).

Step 4: Implement Systematic Investment Plan

• Invest $500 monthly using dollar-cost averaging.
• Set up automatic transfers to the investment account.

Step 5: Monitor and Adjust

• Review portfolio annually.
• Rebalance to maintain 60/20/10/10 allocation.

Conclusion

By defining your goals, assessing your risk tolerance, choosing the right investment vehicles, and maintaining a diversified portfolio, you can grow your wealth steadily over time. Starting small, being consistent, and seeking professional advice when needed will help you stay on track. Remember, investing is a long-term journey, and patience and discipline are key to achieving your financial goals.