7 Steps to Secure Your Financial Freedom
In this article we talk about the Investing Strategy that The Truth No One Tells You and 7 Simple Steps to Secure Your Financial Freedom.
Do you want to succeed as an investor?
So define an investment strategy and stick to it.
Having a very clear and documented investment strategy is the starting point for you to be successful investing.
If you like investing, or the topic of “investments”, you have certainly noticed that the financial market is constantly invaded by trendy investment products and ideas…
“Bank X sees potential in stock Y and says it could soar up to 79% in 2017”
“Trader who gained 100% on the stock exchange now recommends investing in foreign exchange”
“’Now is the golden hour’, says expert”
I could name 50 more examples, but I think you get the point.
These sensational “headlines” end up encouraging novice investors to rotate their portfolio a lot.
This happens because most players in the financial market earn in the turnover of the portfolio.
In the purchase and sale of its clients’ assets.
After all, whenever you make a trade, your advisor and broker are paid.
Thus, the entire system ends up being remunerated while most investors lose money.
This is practically right!
In fact, if there is one certainty about investments, it is the certainty that you will lose money by choosing your investments at random.
And how to avoid this type of choice without criteria?
It’s simple: just define a good investment strategy.
And that’s exactly what I’m going to teach you in this complete article.
THE BEST SHORT-TERM INVESTMENT STRATEGY
Many people ask me what is the best short-term investment strategy.
And I understand this question well.
After all, we tend to believe that there is some “magic formula” to make a lot of money investing in short terms.
The very headlines I quoted at the beginning of this text convey this impression.
Thus, many start investing seeking immediate wealth and end up, of course, losing a good part of the invested capital.
Well, my answer to this question is always the same: the best short-term investment strategy is to leave the money “stopped” in fixed income assets with floating interest rates.
These are those assets that yield a little throughout the day, such as the Selic Treasury (LFT).
And this answer of mine usually frustrates the questioner.
After all, they expect me to respond with something like “ buy the stock in this small company, because it’s going to blow up ”.
But my conviction is that there is no strategy capable of generating relevant and consistent gains in the short term.
And that’s exactly what people are looking for!
I’m sure if I wrote a book with a title like “The Action That Will Change Your Life,” it would sell many copies.
The problem is that I would not be being correct with the readers.
Honestly, I don’t know anyone who has transformed his life (for the better) with short-term investments.
On the other hand, I know a lot of people who lost a good amount of money with this type of investment.
THE BEST LONG-TERM INVESTMENT STRATEGY
Now yes, we enter where the money is
In fact, we understand that this is the best investment strategy for the long term.
After all, a good investment strategy is one that gives you an advantage over other market participants.
And the asset allocation strategy makes the investor who applies it take advantage, in terms of behavior, over other investors.
Yes, the “human” factor is very present in financial markets.
It is no wonder that every time a new “bubble” bursts and that the financial market constantly goes through cycles of euphoria and panic
In addition to protecting you from these cycles, good asset allocation means you are constantly buying investments at the low and selling at the high.
This is the biggest benefit of portfolio rebalancing , promoted by asset allocation.
But its benefits don’t stop there!
With a good asset allocation, you will also be doing a smart diversification of your portfolio.
And this smart diversification is probably the best way there is to protect your emotions as an investor and control the risk of your investments.
Well, I think I’ve managed to explain well why we like the asset allocation strategy so much.
Of course, I don’t want to impose it as if it were the “best way to invest”.
My intention here is to act as a facilitator to guide you towards success as an investor.
And, in this task, I need to make it very clear what I think is the best investment strategy for everyone.
HOW TO CHOOSE THE BEST INVESTMENT STRATEGY FOR YOU
There are dozens (and even hundreds) of investment strategies and different asset allocations that you can follow.
The “best asset allocation in the world” simply does not exist.
This is because each person is unique and thus has their own characteristics, their own time horizon, their own risk tolerance and so on.
So, I created the step-by-step guide below to help you define the best asset allocation for you!
I already talked about this topic in the last post about personal financial planning , but it never hurts to remember here.
The reality is that, before you start investing, you need to have a very well-defined why.
Ask yourself the following question:
Why is money important to me?
This seems like a simple, even a bit silly question.
But figuring out your answer might not be so simple.
Perhaps you think of something more generic and abstract, like “freedom” or “security”.
In this case, repeat the question:
Why is freedom important to me?
And so on.
Until you reach a point where you realize what the most important things in your life are.
While most of them are not directly related to money, money will certainly help you win them over.
And understanding your “why” of investing is essential for you to understand what your main values, desires and fears are .
And recognizing your values, desires and fears is a key factor in defining and documenting your investment strategy.
After all, before you start investing you need to know why you are investing.
Another very important point before choosing the best investment strategy for you is to define the term of your investments.
“Compound interest is the eighth wonder of the world. Those who understand its workings receive it. Those who don’t understand, pay it.” – Albert Einstein
In other articles, we have already explained how powerful compound interest is.
This “power” is the result of two variables:
- Rate of return on your investments
- Investment term (or time horizon)
The longer the term of your investments, the better your final result will tend to be.
This is due to the “snowball” effect provided by compound interest.
In addition to this very important point, defining the term of your investments is also essential for you to define the best allocation of your assets.
You need to have good predictability of when you will need to draw on your investment portfolio for redemptions.
This should directly change the composition of your portfolio, as we’ll see next.
You need to invest your money according to different timeframes.
And this is very important!
Investing in variable income an amount that you will need to use in the next year, or the next few years, makes no sense.
This is because variable income assets are subject to uncertainty and may experience large devaluations in short time horizons.
Therefore, the third step in defining your investment strategy is to be very clear about which part of your portfolio is invested for the long term and which is not.
If possible, even use different accounts/brokers for each investment term.
The ability to take risk is a relationship that exists between your current financial condition, your investment horizon and your return objective.
The larger each variable, the greater its ability to take on risk.
If you need the equity that you will invest in less than a year, for example, your ability to take on risk is low!
In fact, it is worth making a quick parenthesis here: this “risk” that I am commenting on is the market risk.
It is the “risk” of seeing your portfolio devalue in given periods of time.
Risk tolerance is a much more subjective factor than ability.
“Risk tolerance” is nothing more than understanding how much you would accept more risk to have, in return, a possibility of assuming a greater return.
As a rule, it is difficult to define what your real risk tolerance is.
A good strategy is to try to imagine how you would feel to see your investment portfolio devaluing 5%, 10%, 15% and even 20% in given periods…
Importantly, risk tolerance can vary over time and is highly impacted by recent events.
This brings us to the next step…
One of the biggest challenges you may face in your quest for financial success is varying your risk tolerance.
During the Brazilian stock exchange boom , from the early 2000s to 2008, many people began to invest in stocks.
At that time, the fashion was to call oneself a “bold investor”.
It’s even easy to see why: the stock market rose steadily, quarter after quarter, bringing returns far superior to any other asset class.
With the fall of 2008 and, mainly, with the bad years that followed from 2011, many investors who used to say they were “bold” started to consider themselves “conservative investors”.
This not only exemplifies how risk tolerance is affected over time, it also creates a great paradox.
A paradox I call the “conservative investor paradox”.
By the definition of common sense, a “conservative” investor is one who wants to preserve his assets first and foremost.
It’s that investor who can’t stand to see his portfolio devalue.
However, I like to look at this definition in a different light: what should matter most in defining “conservative” or “bold” is how likely you are to achieve your financial goals.
The likelihood that you will preserve your vision of the future.
Being a “conservative” investor who invests 100% in fixed income greatly reduces your chance of long-term success.
You can even sleep better knowing that you don’t have any equity assets in your portfolio.
But in the long run, this can be highly damaging to your equity.
This paradox exists because the posture of keeping all your investments in fixed income can be, in fact, very aggressive.
And I say “too aggressive” because this stance will reduce your long-term returns and, consequently, your chances of achieving your financial goals.
So think about what type of investor you are, understand that your risk tolerance is going to change, and keep a portion of equity (at least 30%) in your asset allocation.
Realize that sometimes “conservative” can actually be “aggressive”.
Investing is a game of emotions.
The less emotional you are, the better your long-term performance will be.
Most investment mistakes and failures are not the result of a lack of knowledge.
They are, in fact, the result of emotional sabotage.
Media headlines (those quoted at the beginning of the article) often inflame investors’ emotions.
The reality is that you don’t need to know what’s happening in the financial markets minute-by-minute, hourly, or even day-to-day.
You also don’t need to know which stock the trader so-and-so thinks is going to rock in the next 10 days.
This creates absolutely no value for you if you develop the long-term vision necessary to thrive.
Excluding emotions also means keeping an eye on your “passions” within the field of investing.
Because whenever you “fall in love” with a specific asset class, specific stock or even a market “guru”, you will let your emotions take over your decision process.
And in this way, you will end up abandoning your ideal asset allocation.
More than that, you will end up concentrating your investments and, probably, losing a lot of money.
How much is your time?
In the age we live in, we have less and less time available to take care of ourselves and the people we care about.
So why would you spend your precious time checking your investments daily?
What seems better: checking the economic news, the evolution of your portfolio and the investment forums 1 hour a day or checking the performance of your investment portfolio 15 minutes a month?
I honestly prefer the second option.
And this is one of the great qualities of the asset allocation strategy!
With it, you can free up your time to do what you love and what is most important to you!
After all, investments are like plantations: it’s no use checking the performance of the seeds you’ve planted every day.
Their growth requires patience and time, in addition to the occasional work to water them!
So, stop looking at the market all the time.
As you may have already realized, no investment strategy is magic.
None will work consistently, every month.
Here, we understand that the best possible strategy is to define a good asset allocation for the long term and stick to it.
But we are also humble to say that there is no “best asset allocation in the world”.
The “best strategy”, or “best allocation”, depends on personal factors for each of us.
And in this article we present the 7 Steps to Secure Your Financial Freedom.