d. Investment strategy: Your investment strategy describes how you will you invest your money. It clarifies how you will manage, prioritize, and fund your investment; it also describes how you will evaluate new investments. The following paragraphs explain some of the questions you should answer about your investment strategy.

Will you use active management or passive management? Active management is a strategy in which you try to outperform your benchmarks by actively buying and selling stocks and bonds. This strategy requires considerable time and expense to maintain. Passive management is a strategy in which you invest in index funds, or exchange-traded funds, instead of trying to beat your benchmarks: index funds, or exchange-traded funds, simply mirror the performance of your benchmarks. This strategy is much cheaper in terms of time and costs, and it is often more tax-efficient as well.

You may also choose to use a combination of active and passive management for your portfolio. For example, you may choose to use active management for your tax-deferred accounts (these accounts do not require you to pay taxes until retirement when you withdraw the money) and passive management for your taxable accounts (these accounts require you to pay taxes each year). Your choices will depend on your goals, your objectives, and your investment style.

Will you invest in mutual funds or individual assets? Mutual funds are professionally managed portfolios that are composed of similar assets; mutual funds offer the benefits of diversification and economies of scale. Investing in individual assets, such as stocks and bonds, allows you to control what you invest in and when you will realize capital gains. While it is much more exciting to invest in individual assets, these assets also involve much more risk and instability. You may choose to invest in a mix of assets: a combination of mutual funds and individual stocks or bonds.

Will you use leverage in your investing? Using leverage is the process of borrowing either money or securities for your investment activities. Using leverage is not recommended. While leverage increases the potential for return on an investment, it also magnifies the potential for loss. Many investors have lost significant amounts of financial assets by using leverage. There are two types of leverage used by most individual investors: buying on margin and short selling.

Buying on margin is borrowing to purchase a stock. The amount of borrowing you use is referred to as your “leverage.” For example, you are sure the value of a stock you do not currently own will go up soon. You invest $10,000 of your own money and invest another $10,000 that you borrow from your broker—buying on margin. If the value of the stock goes up, you make a larger profit because you used leverage to invest more. However, if the value of the stock goes down, you incur a larger loss because you invested more, and you must still pay back the $10,000 you borrowed, regardless of the price of the stock.

Short selling is another type of leverage in which you borrow stock and then sell it immediately. For example, you are positive the value of a stock will go down. Before the stock goes down, you borrow a hundred shares of that stock from your broker and sell them. Again, you are borrowing, but this time you are borrowing stock instead of money. If the stock price goes down, you will be able to buy the shares back at a lower price; you make a profit by selling the borrowed shares at a higher price and buying them back at the lower price to replace the stocks you borrowed. However, if the value of the stock goes up, you will have to use your own money to buy back the more expensive shares; you must also repay any dividends paid during the period you borrowed the shares.

Using leverage is risky because you can lose much more than you originally invested. Do not take the chance. President Joseph F. Smith stated the following:

If there is anyone here intending to go into debt for speculation . . . I would advise him to hesitate, pray over it, and carefully consider it before he obligates himself by borrowing money and going into debt. In other words, keep out of debt if you can. Pay your debts as soon as you can (Conference Report, Oct. 1911, 128–29).