The investment strategy should contain guidelines on rules and procedures, and warnings against potential conflicts of interest that might arise from certain allocations.

When building an investment strategy, the following principles should be applied:

  • The strategy should match the specific investor’s profile in terms of goals, time horizon, and risk tolerance. For example, it is unreasonable to recommend a portfolio with 80% stocks to a risk-averse person who wants short-term preservation of capital and does not expect to achieve high returns.
  • The investment strategy should include the following explanations:
    • The strengths and weaknesses of the strategy. This is required to maintain the investor’s confidence during periods of low performance.
    • Investment benchmarks. This knowledge allows the investor to measure the efficiency of the particular investment strategy compared to market conditions and the investor’s goals.

Examples of investment strategy patterns offered by financial institutions are as follows:

Charles Schwab:

Charles Schwab investment strategy

Merrill Edge:

Merrill Edge investment strategy

Vanguard:

Vanguard investment strategy

Digital tools build investment strategies based on algorithms that translate the investor’s data into recommendations. A poorly designed or poorly coded algorithm may result in a strategy that is irrelevant to the investor’s goals, risk tolerance, or time horizon. Creators of digital financial advisory systems should consider the following:

  • The advice tool that provides investment recommendations should comply with regulatory requirements.
  • The algorithm used to build investment strategies may need to be tested on a regular basis to ensure it remains appropriate as market conditions change.

B2B financial platforms may provide tools that allow financial advisors to use their own algorithms to build investment strategies. In this case, the advisor should have tools to test whether the algorithm has been interpreted correctly by the system, and to ensure the outputs comply with the advisor’s expectations.

Bottom Line

Above, we have discussed the first three steps of the entire portfolio management process. The next step, i.e. asset allocation, will be more closely discussed in the following article.

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* Time horizon is the length of time over which an investor expects to hold their investments.

** Risk tolerance is the investor’s attitude to risk and their willingness to absorb potential loss.

*** An asset class is a group of investments that have a similar financial structure, are subject to the same rules and regulations, and tend to show similar behavior in the marketplace. Investments are often divided into the following asset classes:</p?