Being a copycat won’t serve you in life, and it won’t help in investments either! Your unique situation changes how you invest, so adopting someone else’s strategy won’t always work for you, even if it is working amazingly for them. To live the life of your dreams (not someone else’s), you need to invest in your own way.
Here are five reasons a unique investment strategy will help you win.
1) You have unique goals
Everyone wants something different. You may say “I want a lot of money and to be happy”, but your definition of both of those is tempered by your past experiences and frame of reference. This means that even if your neighbor also says they want a lot of money and to be happy, they have something completely different in mind. Because of this difference, you have set different personal goals than your neighbor, and your investment strategies should be tailored to meet your goals, not theirs. Goals are the fundamental platform on which all investment strategies are built, so if your goals are unique, your strategy should be too.
2) You have unique needs
What you need will change how you want your investments to pay you. For example, if you have yet to retire, you may still want investments that favor growth, to maximize the assets you have when you hit that magical number. On the other hand, a retiree will favor less growth, high value investments. This is because most retirees will need that money soon, and can’t afford the risk associated with high growth investments. Retirees may also prioritize fixed income, so they can count on a set amount of income each month despite not working. Whether it is supplemental income or growth investing, the way you stash your cash will change based on when you need it and how much of it you need.
Alongside your income needs, you also have personal needs. These are the things that make you feel comfortable when you invest. Usually, people need a cash account so that they can react quickly to an emergency, but the size of that account will change from person to person. The size of this account depends on a person’s “risk tolerance”. Risk tolerance is the amount of financial risk you are willing to take on in order to make money, and it will radically change where you invest your money. If you are a person who is constantly worrying about money or checking your bank account, then having a volatile portfolio might scare you too much and cause you undue financial stress. Most people don’t think they can handle a 50% drop in their invested assets, but this happens in risky portfolios all the time. For some people, that is the risk they are willing to take to participate in the upper echelon of returns. For others, that is just too worrisome. It is important to know the maximum amount of risk you can handle so that you can maximize the return on your investments without overstressing yourself.
3) You have unique obligations
Debt is unique in your financial environment because it is very hard to reduce without simply paying more cash toward the balance. Outside of refinancing, you probably won’t be able to reduce your debt payments. Because of this, debt forms the floor of your financial needs, meaning no matter what, you will need that amount of money every month just to stay afloat. For investing, this sets several boundaries on how you invest.
The first boundary is how much you can invest in the first place. Every month, debt gets paid before savings (except for mortgage debt). This means that if you have more debt, you have less free cash to put into investments.
The second boundary concerns what you invest in. If you are worried you can’t make your debt payments out of your income, you may want to invest conservatively to preserve capital, as well as investing in liquid assets so that you can pull your money out when you need it. Overall, high debt usually reduces the amount of risk you are willing to bear, which will probably decrease your returns. To get high investing returns, pay down debt as quickly as possible so that more money can be invested as soon as possible (you will also save money in interest).
4) You make unique income
Even the way you make money is different! Your paycheck is unique to your situation, same with your housing situation and side work. This (I’m sure you saw this coming) changes how you invest! It also changes what you can invest in. Anyone with a net worth over a million dollars (excluding primary residence) is an “accredited investor”, and they will be able to invest in private offerings that normal investors simply can’t access. Mutual and hedge funds will sometimes have a minimum investment, also removing them from the options list for regular investors.
Don’t fret if you can’t use these investments. There are still more than enough ways to use your money to generate income. All I am saying is that the money you make and the assets you have will change where you put your money.
5) You have a unique time horizon
Time horizon is how much time you have to invest your money. This is determined by when you start investing and when you will need to pull the money out. If you are saving for retirement at age 65, your time horizon will be 65 minus your age. If you begin saving for your child’s college during her infancy, the time horizon of that investment plan will be about 18 years.
Time horizon determines how much time you have to take advantage of compounding, how liquid your investments should be, and how risky they can be. If you are 40, you still have 25 years until retirement. This means you can invest in growth stocks, because you will have time to wait out the down times. On the other hand, if you are already retired, you will want to have more easily accessible investments that preserve your capital and are much less risky. This is because you can’t afford the large downturns of more volatile investments, and locking up your cash might leave you financially stressed while you wait for the bonds to mature.
Having a unique investment plan keeps your finances in line with your lifestyle and goals. If you are curious about investment opportunities, free websites like Investopedia will provide accurate digestible information. The more knowledgeable you are, the more likely you are to make good investment decisions.
Financial advisors are also a great resource. At Pacific Investment Research, we offer a free, no strings attached meeting to answer any of your questions. We are investment and financial planning professionals, and the best part of our jobs is making sure that you are an educated and confident investor.
For more information on investing, retirement, Social Security, or the markets, check out our blog.
To learn more about individualized investment strategies, visit our website.