When making any type of investment decision, investors often overlook the strategy they established right at the start. In fact, they often ignore the strategy altogether and never put it in place. While some may feel that coming up with a proper strategy is counter-productive to earning money, defining the right portfolio for your overall investments is an activity that cannot be taken lightly.

One of the reasons why mutual funds can earn steady returns over the long-term, whether those returns are consistently above or below their benchmark has to do with the strategy that the fund manager of fund company establishes at the fund’s inception. They can be as specific as allowing only a maximum of, say, 15% to be invested in Real-Estate specific securities or as vague as 80% must be invested in domestic shares. The details are often left to the manager, but your own personal investments should not be so vague.

Building a proper investment strategy will need to incorporate several aspects of your goals — how much growth, how much speculation and how much income you want to bring into your portfolio on an annual basis. Let’s take a closer look:

Speculation - set aside a pre-determined amount for speculative investment opportunities. If your long-term strategy incorporates such investments, be sure to limit the amount of money to this area. If you choose a 25% limit for, say, options trading, stick to that limit. It could mean reducing exposure in other, more-stable assets to continue investing this way, but since it will always be a percentage, the rest of your assets will help reduce the total exposure of your portfolio — you will never be “all-in.”

Growth - as an aggressive investor, you will likely invest in growth opportunities, securities that have shown a steady level of growth over the years. Make sure to stick to whatever limit you choose for this asset class even if the class is not performing to your liking (in fact, if changes must be made, shift to another growth investment and not another class of investment).

Income - everyone needs to generate income in their portfolio. Allowing even just 10% for income investments is highly recommended, even for the most aggressive and speculative investor.

By understanding the different considerations (above) that even the most aggressive investor should incorporate, at a minimum, into their investment strategy, it becomes clearer that this process not only provides the foundation of their overall portfolio, but for their investment behavior as a whole.

Regular, long-term investors also need to make similar determinations, but will focus on asset classes — Cash, Income, and Equities — instead. Sounds easier? It is not. Each class (except cash) involves specialized areas, such as small-cap, sector-specific, and other specific investments and that is just in the equity class.

Overall, spending a good hour or two building your strategy is not uncommon. Because once you have established it, it needs to be something you never question again until your circumstances change (e.g. you have just 5 years until retirement instead of 25 when you first built your strategy, or some other life-changing event occurs).

Learn Investment Management Strategies at the MutualFundSite.org.

Chris has more than 16 years of experience in the financial services industry. He is currently the Fund Advisor for the MutualFundSite.org, a website that helps people decide Where To Invest.