I’ve had a number of strategies for investing over the years. Initially I was a property investor who planned to do a FIRE (Financial Independence, Retire Early) type approach to saving in order to buy 5 houses to rent, then give up the aggressive FIRE saving to live a normal life for 30 years until those houses were paid off so I could live off the rent.
The property market changed a few years into my plans, which altered my strategy as each year passed, changing from a strategy to buy and sell to retire, to a buy and leverage to buy stocks, eventually becoming too much of a burdon in the effort to do my tax returns and dealing with bad tenants, causing me to part ways with property and focus solely on stocks.
I then discovered Angel Investing, and have made significant gains investing a number of six-figure sums in a handful of companies in this arena, which has altered my retirement timeframes significantly.
With my retirement timeframe brought forward, I now need to change my investment strategy from investing in growth stocks that will eventually pay dividends in 5-10 years time, to a new strategy that will give me an income and security in my retirement, which will be either next year or the year after – though truthfully I haven’t decided if I want to work for a few more years to get more security, socialize while my friends are at work, or become mega rich (the later is possibly less interesting to me, unless it would facilitate some other interest, such as making a business out of some of my inventions – yes, I’m also an inventor!).
Having a strategy is something often talked about, but not often explained. People new to investing will always say:
“My strategy is just to make a bunch of money.”
“Buy low, sell high!” – words often proclaimed by the least educated of investors.
“I will invest in shares until I have enough money to buy a house.”New Investors
Actually to be fair, the last one in the list of quotes there is almost a strategy.
To build an investment strategy, you first need a goal. That goal will most likely be to buy a house or save for retirement, though it could be as simple as buying a car or saving for a holiday. In fact, I would suggest that everyone’s goal should be to save for retirement, and holidays, homes and cars are things that you include in your strategy as interruptions along the way.
Once you have a goal for your strategy, you need to do some financial modelling. This will tell you what you need to do in order to meet your goals.
To do a financial model, first work out how much money you’ll need to attain your goal(s). Then work out how much you can save, how much you’ll need to invest each year, and how much your investments need to grow to attain the goal(s) set out. You’ll need to do several of these models to model what happens if things go right, wrong or somewhere in between. You’ll need a strategy for each scenario (or at least a strategy to deal with the near term issues).
Once you’ve got your models sorted out, you should think about whether they are tolerable. Do they prevent you from having the sort of life you want? If so, perhaps you can make another model that has some compromise? Your compromise should not involve making your financial models rely on your situation becoming more fortuitous than you might realistically expect. Alternatively this might be the nudge you need to put in the effort to get that higher paid job.
Once you have your financial model, you should refine your investment strategy around this. There might be a few investment strategies that fit your models. For example, at for the past few years, my strategy was to save like crazy then put my savings into investments that will grow at a rate that does not require me to save any of my salary – which I then used as a giant leisure budget as compensation for my time spend saving. Of course this was balanced by a backup plan which involved my savings being redirected back to investing if things didn’t go to plan.
You should always have at least one backup plan.
In fact, not only should you have backup plans, but you should have multiple plans that phase in and out of existence as situations change, much like my car keys seem to when I’m looking for them.
My Investing Strategy For 2021
My goal remains the same, which is to retire, but my timeframes have changed significantly. Therefore my new goal is to invest in things that will:
- Give me dividends within the next 1-2 years, every year. This basically means that I need investments that give me dividends now, which have a history of paying dividends, so I can be sure that they will produce dividends in 1-2 years.
- Gives me security of income for decades to come. This means that I’ll need access to a pot of money that can get me through bad times, with possibly a Plan C in case that goes awry. This also means that I’ll need my dividend producing stocks to grow the dividend return at a rate higher than inflation to be comfortable, or come up with an alternative strategy such as buying growth stocks that may not pay dividends, but can be sold at a later date to cover the failings of my dividend growth stocks – not my preference. I will also need a significant amount of diversification such that the loss of a few stocks from my portfolio will not make my lifestyle untenable, or have a Plan D that makes my lifestyle less expensive while I save / work for enough money to replenish my position.
As I’ve written a lot today, I think I might write up the rest of my Investing Strategy for 2021 another day. In the next article of this subject I will cover my costs, how I plan to diversify and cover my risks, and my investing strategy for the coming year prior to the preparation for my retirement, which will involved divesting my holdings in companies and investing in dividend paying stocks (unless those companies start of pay reliable dividends backed by a policy in the Company Constitution).