Does your ASX investment strategy match your risk tolerance?

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

A woman sits back and enjoys the view from a paraglider, indicating share price lifts for ASX travel and adventure shares

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • AMP Head of Investment Strategy Dr Shane Oliver says investors must match their ASX investment strategy to their risk tolerance 
  • ASX growth shares tend to suit investors with a higher risk tolerance who want to strive for potentially higher-than-average returns 
  • ASX value shares and income stocks tend to suit investors who are more conservative by nature 

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.

Motley Fool contributor Bronwyn Allen has positions in Anz Group, CSL, and Commonwealth Bank Of Australia. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended CSL, Life360, Lovisa, ResMed, WiseTech Global, and Xero. The Motley Fool Australia has positions in and has recommended ResMed, WiseTech Global, and Xero. The Motley Fool Australia has recommended Lovisa and Treasury Wine Estates. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on How to invest

A happy young couple lie on a wooden deck using a skateboard for a pillow.
How to invest

How to build wealth with ASX shares without taking big risks

Many investors believe they need to chase high-risk, speculative ASX shares to grow their wealth quickly. But in reality, most…

Read more »

Happy man holding Australian dollar notes, representing dividends.
How to invest

How $500 a month in ASX shares could become $1 million

It might not be as hard as you think to become a millionaire through the share market.

Read more »

Man pointing an upward line on a bar graph symbolising a rising share price.
How to invest

How to invest when the ASX hits a record high

Worried about buying at today's prices? Here's why you shouldn't be concerned.

Read more »

A man wearing glasses sits back in his desk chair with his hands behind his head staring smiling at his computer screens as the ASX share prices keep rising
How to invest

Lessons from a self-made ASX millionaire

Here's how he did it.

Read more »

A couple cheers as they sit on their lounge looking at their laptop and reading about the rising Redbubble share price
How to invest

$20,000 in savings? Here's how to target $1,000 of passive income each month

This could be the easiest way to build a meaningful passive income from the share market.

Read more »

Three happy office workers cheer as they read about good financial news on a laptop.
How to invest

The 3 rules new ASX share investors should always follow

These rules could help you generate wealth in the share market.

Read more »

Person holding Australian dollar notes, symbolising dividends.
How to invest

How to build a $1,500 monthly income stream with ASX dividend shares

It isn't as hard as you think to build a monthly income stream on the share market.

Read more »

A smiling woman sits in a cafe reading a story on her phone about Rio Tinto and drinking a coffee with a laptop open in front of her.
How to invest

How to start your ASX share portfolio with just $1,000

Investing doesn't need to be hard. Here's an easy way to start.

Read more »