There are several types of investment strategies to consider based on goals, risk tolerance, and future needs of capital. In this guide, we will have a deeper look at the most popular one.
When it comes to making investments, a lot of factors are considered before a decision is reached. Some investors may decide to concentrate on buying shares that appear cheap, with the hope that they would make a profit if the share price rallies. Other investors may choose stocks that are already on the rise with the hope of getting more profit. Hence, factors that determine which strategies to adopt when it comes to making an investment include financial goals, tendency to take risks, and time horizon. What Is An Investment Strategy?
Investment strategies refer to the principles and guidelines designed to help investors attain their financial as well as investment goals. Basically, it is what guides an investor’s decisions based on goals, risk tolerance, as well as future needs of capital.
Investment strategies can differ from conservative (which involves a low-risk strategy where the aim is wealth protection) to highly aggressive strategies (which focuses on seeking rapid growth by leveraging on capital appreciation). Investors are able to utilize these strategies to formulate their own portfolios or do so via a financial professional. Types of Investment Strategies
There are several types of investment strategies to consider. Growth Investment Strategy
This type of investment strategy is about investing in firms that possess high growth rates. Examples of such companies may include Facebook Inc (NYSE: FB), Google LLC (NASDAQ: GOOGL), Apple Inc (NYSE: AAPL), etc. The growth investment strategy was made popular by Peter Lynch in the later 90s and the aim was to buy shares of companies you know to be valuable, and their future growth can be exploited.
Speaking of pros and cons, the growth investment strategy is long-term in nature and can result in higher returns. Besides, you can continuously transfer capital to stocks with the strongest prospect of growth.
However, a lot of changes have been witnessed in the market since its introduction, and growth companies are hard to come by. In addition, predicting which companies within growth industries would come out on top may be more difficult than predicting high-growth industries. Value Investment Strategy
The value investment strategy is all about purchasing companies when they are put up for sale, and when they are priced far below their original value. When executed properly, investors will get growth from companies as well as small-cap and income investments stocks from stocks that are on sale for a discount, while simultaneously accounting for your value and interests.
Firstly, investors are able to get the highest returns with the lowest amount of risk with a value investment strategy. Secondly, with this type of strategy, you can buy companies when they are put up for sale. That means investors are buying stocks during an economic contraction.
However, with the value investment strategy, you need to be patient, hence it is not for everyone. To be successful with this type of strategy, a lot of education and expertise is required. Failure to acquire the right education can cause investors to lose a lot of money. Indexing Strategy
Indexing strategy is a form of passive investment strategy where investors have the opportunity to construct a portfolio similar to the specific market index.
This strategy not only requires little or no financial knowledge, it also has lower management fees than an actively managed fund due to the passive tracking approach it adopts. However, this strategy lacks downside protection, and investors can not add or remove any holdings. Income Investment Strategy
Income investment strategy involves buying securities that have the capacity to pay dividends. Those into this type of investment strategy believe that they can expect a steady profit on a regular basis. Examples of this include bonds that produce steady income, dividend-paying stocks, and mutual funds based on dividend stocks.
As for advantages, the return with an income investment strategy is decent with minimal risks. If you have a huge capital to start with, you can live off of the interest earned based on dividends instead of betting it on the success of the business.
But the are a couple of cons to think of. Firstly, there is a tendency to focus more on the dividends instead of the value of the underlying company or asset. Secondly, it may take a long time to see a meaningful return when practicing this type of investment strategy. Over a long period of time, […]
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