Take into consideration your life goals and circumstances when deciding on your investment strategy. By doing the work now, you’ll see a clear link between your ideal strategy and your long-term financial plan in the end. Take these factors into consideration to decide on your investment strategy before determining your asset allocation:
Your investment horizon and long-term financial goals: Your money needs to keep working for you far into the future, even if you’re already retired. Do the work now to project your long-term cash flow.
Your return requirements: What kind of return do you need from your portfolio? The answer will tell you how conservative or aggressive your investment strategy needs to be.
Your risk tolerance: How far are you willing to go to get the return you need? The higher the return you’d like, the more risk you must take.
Your constraints: Constraints are nonnegotiable, period. Maybe you won’t consider certain investments for personal or moral reasons, for example. Maybe you won’t even think about dropping a poorly performing stock from your portfolio because you inherited it from your Great-Aunt Jenny.
Your tax situation: Tax-free, lower-yielding municipal bonds may be a good choice for you now — however, taxable, and higher-yielding, bonds may serve you better in retirement, if you end up in a lower tax bracket.
