The importance of an Investing Strategy

Without an Investing Strategy, the beginner investor will feel like a cork floating in the middle of the ocean.

Defining an Investment Strategy

Why invest? In essence, to allow one the possibility to build wealth. Despite this being a seemingly simple sentence, it is profound and complex. When asking follow up questions, it can get even more complicated and very quickly overwhelming. Accepting the simple reason above for the very important ‘why’ question, (though I would argue this needs much further refinement) one can feel inundated with the follow up questions. For example, how much to invest? What will you invest in? How long will you hold the investment? Just equities or bonds or currencies or futures or precious metals or crypto? Pick stocks at random or systematically? Should you go long or short? How do you even buy a stock? What’s a dividend? What about real estate? How do taxes impact me? Does my wife agree? Or maybe, I’ll just watch a movie – that’s much easier to decide on, but which movie?

The investment universe is immense. This could be either a detriment or a benefit. To most beginner investors, it will most likely be a detriment. Without being able to answer the questions above (apart from knowing which movie to watch), the beginner investor will feel like a cork floating in the middle of the ocean. The waves, wind and currents will be fully in control, and the beginner investor will have no disposition to adequately benefit from the immensity of the investment universe. To be able to benefit from the enormous amount of choice provided by financial exchanges, one needs an Investing Strategy. Without an Investing Strategy you will be like that cork floating in the middle of the ocean: aimless.

An Investing Strategy will guide your investment portfolio selection. It will set investing rules, profit objectives, procedures as well as acceptable and unacceptable behaviours and actions. It does not necessarily need to be unique, but it does need to be custom made for your needs and life goals.

A few of the most prominent strategies are momentum investing, value investing and growth investing. There are many more. For me, back when I was first starting to get into personal finance, I read the blog called dividenmantra.com by Jason Fieber. He wrote about investing in dividend paying companies. At that point, I did not entirely grasp the concept of dividends, but I gathered that it was a sort of ‘kick back’ which companies gave back for people buying their stock. At that point (2014) I was tens of thousands of dollars in debt, paying rent, taking the bus to work and actually had no money to invest. I read the blog aspirationally – in the hopes that maybe someday, maybe one day, I could also invest in dividend paying stocks. Since then, I have climbed myself out of debt, and have been able to structure my expenses to have some money left over at the end of the month to invest. Since then as well, the author has sold his site and is no longer writing – this is also one of the reasons that I am writing these posts, in the hopes I can help somebody or create a similar spark.

Dividend Investing

My first few stock purchases, I had no investment strategy. My first purchase ever was in December 2020 when I bought stocks of Starbucks. To assess the stock, I looked at the price over the last weeks and months and I also knew I liked their Frappuccinos. As you can probably tell by now, an outstanding analysis…

To improve my assessments, I have started to read further on Dividend Investing and also enrolled to do a Master’s degree program for Financial Economics. Since then, I have defined my investing strategy and purchased other stocks aligned with my strategy. To assess my stock acquisitions, I review their company strategy, profit & loss statement, balance sheet and a list of financial ratios. Another important aspect is evaluating their dividend yield, payout history and assessing if their payout ratios are sustainable.

I have decided for the year 2021, my first investment year, I will focus on Dividend Investing. I limit the amount of money that I invest per month to what is left over from my pay-check after covering basic cost of living and other obligations. For this year, I am estimating to be able to invest from 20% of my take home pay on a monthly basis. I use the platforms of eToro and Revolut, as they charge low commissions rates for stock trades. Besides investing in equities, I also started to invest in Peer-to-Peer (P2P) lending as this also provided dividends. After reviewing many platforms I decided to invest with EstateGuru as it was the largest platform and offered the most investment opportunities for real estate P2P. I use Binance for crypto currencies. I reviewed and tried many platforms and I would recommend these platforms as they have very low costs and have intuitive interfaces. Referral links in case you would like to use them.

Should you also choose the Dividend Investment Strategy?

You shouldn’t. Unless of course it is suitable for your life goals.

I chose this strategy as I am a novice investor with limited capital and a clear goal. My goal is to be able to retire in 8 years, and to do that I will need income to replace my current job. Also, the limited capital that I invest can start working for me immediately and start paying back dividends. Ideally I would like to hold the equity for at least five year, but the market dynamics and other drivers will extend or shorten this timeframe. Like with any investment, there is risk. I run the risk that the company can reduce, limit or completely get rid of their dividend payment. Naturally, the value of the stock could also decrease. These are all risks that I am willing to take, within a certain threshold of course, hence the limited capital investment. It is only recently that I started to understand and appreciate the famous quote, “the biggest risk is not taking any risk”.

Answering Key Investment Questions

With a clear strategy defined, answering those ominous questions from the start is now not so difficult. Let’s revisit those questions.

How much to invest?

What is left after financial obligations, approximately 20% from take home pay.

What will you invest in?

Dividend paying stocks.

How long will you hold the investment?

Ideally for at least five years.

Just equities or bonds or currencies or futures or precious metals or crypto?

Just equities in 2021.

Pick stocks at random or systematically?

Systematically.

How do you even buy a stock?

Platform of eToto and Revolut. For P2P, I use EstateGuru. For crypto use Binance.

Building your Investing Strategy does take some time and effort. It might even consist of several reiterations until you land on the correct one for you. As of the date of writing this post, I have built my first Investing Strategy for 2021. I am open to further adjustments and optimisations as I keep on learning and growing. This is just as true for me as it is for you: the more time and quality thought you put into an Investing Strategy, the better it will be, ensuring to capture the lessons learned along the way from your finance journey.

I highly encourage you answer the six questions above to start defining your own Investing Strategy. Remember, it does not need to be ‘the best ever investing strategy that ever existed’, nor does it have to be perfect – but it does need to be custom made to fit your investing goals and life needs. By answering the six questions above and committing to stick with it for one year, you will learn if it is right for you. When you observe that adjustments are necessary, update it. Ultimately your strategy will enable you to move forward in the right trajectory, it should provide you guard rails which help help you validate or reject an action for when you think of an investment decision. Your Investing Strategy is a foundational pillar in your investing journey, which will evolve with you through time.