Your investment strategy is your game plan to create your perfect portfolio. But you must find the strategy that best suits your situation, your risk tolerance and where you are in life. Twenty-year-old guys will have a different approach to investing than someone in their 60s.
We generally spend hours preparing for the workday and days or weeks preparing for the holidays or buying your next car. But we often forget the most important plan of all; planning your investments and retirement.
The best thing about investment strategies is the flexibility; if one approach doesn’t suit your investment needs or risk tolerance, you can change with almost no hassle. Keeping the brokerage fee in mind, of course.
There are many strategies an investor can follow. However, these four strategies suit the majority of the investor in the retail or professional space of investing. By taking time to understand each of these strategies, you’ll be in a better position to decide which one works the best for you over the long term without the need to jump ships later.
Value Investing —
Value investing strategy was made famous by Warren Buffett. The principle behind value investing is simple; you buy the companies selling for a lower price than their potential for future earnings. This strategy operates on the belief that the market tends to react erratically to the news resulting in short term fluctuation, even when the intrinsic value hasn’t changed at all. This short term swing in the price allows the value investors to buy the stock and hold at least until the intrinsic value is recognised.
Value investing requires an active research approach but passive buying and selling. Investors spend most of their time researching the stocks and waiting for the entry price. For example; A value investor buys up a lot of stocks in historically successful car manufacture when the stock fell about 30% following the release of their new awful model, so long the investor feels that the new model was a fluke and the company can bounce back over time.
Growth Investing —
This approach to investing focuses on capital appreciation. Growth investor looks for companies that are relatively new to the market but have a growing base of customers with a lot of potentials to become a prominent player in the sector; in other words, the company gives promising signs of outperforming the sector’s growth. What Warren Buffett did for value investing, Peter Lynch did for growth investing.
This strategy is relatively riskier as it involves investing in small companies with little historical data to base your analysis. This investing style aims to construct a portfolio with up to 10–15 stocks in the portfolio. If you’re in the early stage of investing, it can take a lot of time to analyse and find the stocks that best suit this type of investing. Growth investments tend to perform best in the mature stages of the market cycle, and Tech companies are often an excellent example for a growth portfolio. They are often valued high, but they can grow past their valuation in optimal market conditions.
There is no list of hard matrics for evaluating growth strategy. However, there are a few factors an investor should consider. Growth stocks tend to outperform in interest rates falling economy, and the same stocks are often the first to dip at the first sign of a downturn in the economy. An investor should consider the management skills, history and experience of the business’s executive team. At the same time, an investor should look out for the competition in the sector. If the primary product of your preferred company is easily replaceable, then the long-term growth prospect for your investment is dim.
Momentum trading —
In this strategy, traders ride the wave, believing that the winner will keep winning and the loser will keep losing. They look to buy stocks experiencing an uptrend in the belief to capitalise on the uptrend early and ride it as long as possible while shorting the stocks they believe will continue to lose value. This is an extremely risky strategy as the downside is infinite if the stock rallies.
Momentum traders are sort of technical analysts, and momentum investing seeks to take advantage of the short term market volatility. This approach to investing is strictly data-driven and based on pattern recognition. The main rationale behind momentum investing is that it is likely to continue once the trend is well established. There is no consensus among economists and finance professionals about the validity of momentum trading. Economists have tried to explain the effects of momentum investing using the Efficient-Market Hypothesis.
One hypothesis suggests that investors take on significant risks when implementing momentum trading. Potentially high ROI is the reward that counterbalances the risk.
Another hypothesis suggests that momentum traders are leveraging the behavioural weakness of other investors in the market. Such as the tendencies to follow the herd, also known as the “Herd Mentality Bias.”
Dollar-Cost Averaging —
DCA is the investment strategy in which an investor divides up the total capital and invests it over time instead of putting a hundred per cent of the money in one go. This disciplined approach to investing can work wonders if you automate the process, and it becomes easy to stick to a plan if it requires almost no oversight.
The main benefit of this strategy is that it avoids the painful and ill-fated approach to perfecting the market timing. Even seasoned investors occasionally feel the temptation to time the market. And buy when they are almost certain that the market has bottomed out and only goes north from here. To their dismay, the market keeps tumbling down.
When capital is invested in chunks over time, the investor captures all the high and low prices offered by the market. These periodic investments can help lower the volatility in a portfolio.
Employer superannuation contributions are an excellent example of Dollar-Cost Averaging. Those contributions are paid into your super account regardless of the market outlook.
Best investment strategies are not the ones with the best historical returns. Best investment strategies for you are the ones that suit your investing objective within your risk tolerance. You don’t have to choose one and be stuck with that for the rest of your life. You can mix’ n’ match two or more strategies if need be.
Don’t adopt a strategy and later drop it for some hot new trend you found on the internet. Stick to the time tasted basics, and most importantly, don’t unnecessarily modify your portfolio and ruin the compounding process with it.
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