Investment strategies assist investors to choose where and how to invest as per their expected return, risk appetite, corpus amount, retirement age, long-term, and short-term holdings, industry preference, etc. Investors can strategize their investment plans as per the objectives and goals they wish to achieve.
In this post, we will discuss different investment strategies, tips to consider, also, some advantages of investment strategies.
Top 7 Types of Investment Strategies
Let us discuss the different types of investment strategies one by one.
1. Passive and Active Strategies
The passive strategy involves buying and holding stocks and not dealing with them frequently to avoid high transaction costs. They believe that they cannot perform better due to the volatility of the market; Hence passive strategies are less risky. Active strategies, on the other hand, involve frequent buying and selling. They believe that they can outperform the market and make higher returns than the average investor.
2. Growth Investing (Short-Term and Long-Term Investments)
Investors choose a holding period based on the value they want to create in their portfolio. If the investors feel that the company will grow in the coming years and the intrinsic value of the stock will increase, then they will invest in such companies to build their corpus value. It is also known as a growth investment.
On the other hand, if investors feel that the company will give good value in a year or two, they will go for short-term holding. The holding period also depends on the choice of the investors. For example, how soon they need money to buy a house, retirement planning, schooling for children, etc.
3. Value Investing
Value investing strategy involves investing by looking at the intrinsic value of the company as such companies are undervalued by the stock market. The idea behind investing in such companies is that when the market goes for a correction, it will correct the value for such undervalued companies, and then the price will go up, giving investors higher returns on selling. This tactic is used by the very famous Warren Buffet.
4. Income Investing
This type of strategy focuses on generating cash income from stocks rather than investing in stocks that only add value to your portfolio.
Investors can earn two types of cash income:
- Fixed interest income from the bond.
Investors who are looking for steady income from investments choose this type of strategy.
5. Dividend Growth Investing
In this investment strategy, the investor looks for companies that pay dividends consistently every year. Companies that have a consistent track record of paying dividends are stable and less volatile than other companies and aim to increase their dividend payouts every year. Investors reinvest such dividends and benefit from the long-term compounding interest.
6. Contrarian Investing
This type of strategy allows investors to buy shares of companies during down markets. This strategy focuses on buying low and selling high. Downtime in the stock market generally occurs during times of recession, war, disaster, etc. However, investors should not buy shares of any company during the downtime. They should look for companies that have the potential for value creation and branding that blocks access to their competition.
This type of investment strategy grants investors to invest in a small portion of the stocks in a market index. This can be the S&P 500, mutual funds, or exchange-traded funds.
Here are some investing tips for beginners, that should be kept in mind before investing.
- Set a target: Set a target as to how much money you need in the coming period. This will allow you to set your mind straight about whether you need to invest in long-term investments or short-term investments and how much return to expect.
- Research and trend analysis: Do your research properly in terms of understanding how the stock market works and how different types of instruments (equities, options, bonds, mutual funds, derivatives, etc.) work. Also, research and follow the price and return trends of the stocks you select to invest in.
- Portfolio Optimization: Select the best portfolio from a set of portfolios that meets your objective. A portfolio that gives maximum return at the minimum possible risk is an ideal portfolio.
- Best Advisor/Consultancy: Find a good advisory firm or brokerage firm for yourself. They will guide and advise where and how to invest so that you meet your investment objectives.
- Risk Tolerance: Know how much risk you are willing to bear to get the desired returns. It additionally relies upon your short-time period and long-time period goals. If you’re looking for higher returns in a shorter period of time, the risk will be higher, and vice versa.
- Diversification Risk: Build a portfolio that is a mix of debt, equity and derivatives so that the risk is diversified. Also, make sure that both securities are not fully correlated to each other.
Advantages of Investment Strategies
Some of the advantages of investment strategies are:
- Investment strategies allow for the diversification of risk in the portfolio through investing in different types of investments and industries based on timing and expected returns.
- A portfolio can be built from a single strategy or a combination of strategies to accommodate investor preferences and needs.
- Investing strategically allows investors to get the most out of their investments.
- Investment strategies assist to reduce transaction costs and pay less tax.
Limitations of Investment Strategies
Some of the limitations of investment strategies are:
- Most investors find it difficult to outperform the market. It may take them years to earn an average return on investment, whereas professional investors will earn the same return in weeks or months.
- Even though much research, analysis, and historical data are considered before investing, most decisions are made based on predictions. Sometimes, the results and returns may not be as expected, and this may delay investors in achieving their goals.
It’s crucial to have an investment strategy. It’ll help you rule out poor portfolios and will increase your chances of success. Ask yourself some basic questions such as how much I want to invest. How much return do I need? What will be my investment horizon? How much is my risk tolerance? Why did I need to invest? Etc.
The clearer you are about your objectives, the better you will be able to make investment decisions. Always look for good opportunities and never invest all at once. Building a portfolio is such as building a house brick by brick, money by money.