Why You Need to Build Your Own Investment Approach
What’s the most popular New Year’s Resolution out there? Probably some version of “get healthy.”
And the most popular advice to achieve it? Some version of “eat healthy and exercise.”
Okay, yes. That much is obvious. But what does it mean?
Eating healthy to some is getting in your veggies. But what if you’re on the keto diet? Or trying intermittent fasting? Or you’re a vegetarian trying to eat more protein?
And then exercise—what kind? For how long? What works with your body type? What about a pre-existing condition?
The advice to “eat healthy and exercise” is simply not helpful.
And, unfortunately, a lot of investing advice is the same. A lot of it is dogmatic and unspecific, not taking individual preferences, goals, and needs into account.
That’s why I believe every person needs to develop their own investment approach. I opened the conversation about this on episode 63 of The Canadian Money Roadmap podcast, the first in a multi-episode series about how to do it.
Here we’ll talk about why it’s so important to develop your own investment approach, but follow along as we go more in-depth into this topic.
3 Reasons to Develop an Investment Approach
Building your own investment philosophy is important so you can understand what’s going on with your own finances and investments—that much is obvious.
But it’s more than that. It’s a way to gain financial knowledge that helps you make key decisions over time.
Here are three key reasons to develop a personal investment approach.
Avoid Bad Advice
A lot of advice on the internet, YouTube, or podcasts are dogmatic—they’re widely-held beliefs that go unchallenged and unquestioned.
And it’s not to say everything out there is wrong, but if you don’t understand the fundamentals of investing and your own personal approach, you don’t know to question certain things.
Just as people often say to “eat healthy and exercise,” the common advice online for investing is usually “buy index funds.” But, just like the first answer is too broad to be helpful, so is the second. Index investing is absolutely a great tool, but you need to understand it thoroughly to ensure it’s the right investment approach for you to follow.
2. Know What Questions to Ask
Whether you’re working with a financial advisor, a roboadvisor, or are a DIY investor, you need to know what questions to ask.
Understanding your own investment approach helps you make better decisions over time. Instead of blindly following someone’s advice, you can have a clear understanding of what’s going on in your investment portfolio.
3.Change Your Approach Over Time
Like most things, your approach to investing will change over time. This will be based on life events, new goals, economic trends, or by gaining more education and knowledge.
But if you don’t work to develop your own investment approach, you’ll never know how to change it over time. It’s important to have the fundamental knowledge that allows you to pivot as needed over your life.
Considerations to Build Your Investment Approach
If building a personal investment strategy allows you to make good financial decisions, the next question is this: how do you do it?
As mentioned, I’m going to explore this topic over a series of podcast episodes, starting with episode 63, so follow along there!
There are some fundamental knowledge areas that will help you build an investment approach. They are:
Stocks vs. Bonds: How you allocate assets, along with their associated risk and other features, are a key part of your overall investment approach.
Strategic vs. Tactical: This refers to how you manage your portfolio. Are you only occasionally rebalancing things over time or taking on a tactical approach, buying and selling frequently?
Active vs. Passive: Are your passive investments actually as passive as you think they are? This is a layered topic, and important to understand as part of your overall investment approach.
Growth vs. Value: When purchasing stocks and equities, which do you prefer? Growth is the idea that companies are quickly growing, though they may cost more. Value stocks typically have a lower price for future profits.
Concentration vs. Diversification: This refers to the number of holdings you have—concentration would be few holdings, even within something like an index fund, whereas diversification refers to broader holdings.
Small Cap vs. Large Cap: “Cap” refers to market capitalization, which is the number of shares outstanding for a company multiplied by the share price—the total value of the company on today’s pricing. You may have a preference towards one or another (or somewhere in the middle) as part of your personal investment approach.
Each of these topics has a lot of interesting nuance and complexity to them. But the goal here is not to get bogged down in details and make things more complex but to prioritize your financial education and develop a personal approach to investing.
As you understand what impacts an investment strategy, you can more confidently make decisions that are right for your decision.
I’m always curious to learn about other people’s investment strategies, so feel free to shoot me an email at hello@evanneufeld.com to share with me! You can also reach out with questions or comments so I can best tailor my content to what you’re looking for.
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Evan Neufeld is a CERTIFIED FINANCIAL PLANNER® professional in Saskatoon, Saskatchewan and offers both investing and fee-only financial planning services.
*Disclaimer: Any numbers or rates of returns are used for illustration purposes only and should not be taken as fact. Note that the information in this article is current to the time of writing but is not guaranteed as up-to-date past then.
This article and accompanying podcast do not constitute personal financial advice. Evan Neufeld is a CERTIFIED FINANCIAL PLANNER professional in Saskatoon, Saskatchewan, and provides this Canadian personal finance content for educational purposes to the public. You are welcome to contact Evan to receive personalized fee-only financial planning or investment portfolio management.