Does your ASX investment strategy match your risk tolerance?

Your ASX investment strategy is your roadmap on the journey to wealth from ASX shares.

In an article this week, AMP Head of Investment Strategy Dr Shane Oliver discussed the importance of investors understanding their personal risk tolerance in order to make the best investment decisions.

Dr Oliver said:

When embarking on your investing journey, it's worth thinking about how you might respond if you found out that market movements had just wiped 20% off your investments.

If your response is likely to be: "I don't like it, but this sometimes happens in markets and history tells me that if I stick to my strategy, I will see a recovery in time" then no problem.

But if your response might be: "I can't sleep at night because of this, get me out of here" then maybe you should rethink your strategy as you will just end up selling at market bottoms and buying at tops.

What's your ASX investment strategy?

So, step one in working out the best ASX investment strategy for you is to consider risk vs. reward.

Here are three key questions to ask yourself.

1. Will you accept higher risk for potentially higher reward?

If yes, then perhaps ASX growth shares are for you.

A growth share is a company that is expected to grow at a faster rate than the S&P/ASX All Ordinaries Index (ASX: XAO) or S&P/ASX 200 Index (ASX: XJO). 

Growth shares are dominant in market sectors such as technology or biotechnology.

Examples include WiseTech Global Ltd (ASX: WTC), Xero Limited (ASX: XRO), and Life360 Inc (ASX: 360) shares.

There's also CSL Limited (ASX: CSL) and Resmed CDI (ASX: RMD) shares.

Many growth shares are ASX small-cap shares. This means they are young companies with smaller market capitalisations of between a few hundred million and $2 billion.

2. Are you a more conservative investor?

If yes, then perhaps ASX value shares are for you.

Value stocks are companies that investors perceive to be trading below their intrinsic worth.

Perhaps they have been unfairly punished by the market due to broader negative sentiment that has nothing to do with the fundamentals of these companies.

Value stocks are typically large, established blue-chip companies that pay dividends.

Investors aim to snap up these companies at a discount and either hold them or sell them when their prices rise.

Value stocks do not typically rise as quickly as growth shares. However, they do pay dividends.

This means you can count on at least some return on investment (ROI) even in the years when share prices go down.

Some brokers think Treasury Wine Estates Ltd (ASX: TWE) shares are in the bargain bin today.

Patient value investors may also like to take up a few beaten-down ASX 200 retail shares as part of their investment strategy.

Budget fashion jewellery retailer Lovisa Holdings Ltd (ASX: LOV) is a hot value pick among brokers right now after the share price took a two-month tumble.

3. Are you an income investor?

If you want to generate a steady passive income stream from your ASX investment strategy, then dividend shares are for you.

Dividend shares are typically larger companies that are well-established with solid profit streams. Year after year, they pay out reliable dividends that investors can use to fund their living costs.

ASX 200 bank shares, such as Commonwealth Bank of Australia (ASX: CBA) and ANZ Group Holdings Ltd (ASX: ANZ), are classic examples of income stocks.

They may even be viewed as value buys, given bank share prices have been pummelled in 2023. And they pay big dividends.

To check out how much each of the banks is expected to pay in dividends in FY24, see our article here.

Retirees are the dominant group of income investors in Australia.

When planning for your retirement, it's a good idea to establish an annual income goal first, then work backwards to determine your ASX investment strategy to get there.

Check out our article on how to generate $100,000 in annual retirement income from ASX shares.