If you are new to investment, then you are wondering what you can invest in. To begin with, are you a traveler, a dreamer, or a student? Do you want to fulfill all your dreams? But you don’t know how? Well, investment is the answer. But to do so, you need an investment strategy. Let’s find out what is an investment strategy in this article.
What is Investment Strategy?
An investment strategy is used in the financial and investing world to describe an approach to investing.
It is a plan for selecting a financial instrument tailored to the investor’s needs, goals, risk appetite, specific interests, and time horizon. Moreover, it plays a key part in portfolio management, a process that involves an in-depth analysis of investor’s goals, interests, market strengths, weaknesses, opportunities, and threats. For an investor to choose the right investment strategies means to choose the most suitable investment product in the market.
What are the Principles of Investment Strategies?
Before listing the types of investment strategies, it is important to set your financial objectives. So, it’s time to explain the principles to help you determine your portfolio.
1- Long-term vs. Short-term:
Investing in long-term goals (5+ years) make sense to choose stocks and stock funds. However, there are smart ways to aim for short-term (less than 5 years) ones. For example, if you are saving for a down payment of a house, you might want to choose a more stable environment to save them like a saving account. But, the problem in the short-term goals is that you cannot grow your money with a short-term goal because there is less time to check the stock market’s volatility. While taking retirement, a long-term saving goal, unlike short-term goals, can handle the fluctuations of the market for a longer period. Examples of long-term investment vehicles include stocks and index funds. Short-term investment is an investment that you expect to hold for 3 years or less than to sell or convert to cash. For instance, short-term investments include money market funds, deposit certificates, and short-term bonds.
2- Active trading vs. Passive:
How involved do you want to be in your investments? Do you prefer actively trading or passively leave it to the trusted financial institutions? Most beginner investors prefer a passive way of investing. There are plenty of options like Mutual funds, indexed portfolios, or robo-advisors – an automated, low-cost investing service to handle their savings rather than taking the challenge in making their own choices. For example, active investing includes paying a person for the regular buying and selling of individual stocks by mutual funds, while a passive investment approach means investing in index ETFs instead of stock picking. The active investment aims to beat the market, where it seeks to track the market as a passive investment.
3-Low-risk vs. High-risk investing:
Risk is fundamental to investing; there is no serious debate about returns or performance considering the risk involved. Nonetheless, the problem for new investors is finding out where the risk is and the distinctions between low risk and high risk.
Volatility in the prices of investments is inevitable, but there is always a different level of “willingness to take on risk”. For example, investors who pursue higher rewards are usually taking higher risks, when low-risk usually means slower earnings, which makes them good options. At the same time, high-risk is one with a bigger chance of loss of capital or under-performance or a relatively high probability of a devastating loss. That’s why you should be careful and consider all circumstances.
There three main pillars:
- How much risk financially you need to take to reach his financial goal;
- How much risk you are ready to take, means the client’s attitude to risk psychologically;
- And finally, how much you can afford to take, means that if a client is willing to invest all his savings with existing dependents and huge debs, he should temper down his appetite for risk.
What are Popular Investment Strategies?
Now when you finalized your time horizon, risk attitude, financial goal, and approach to investments, let’s find your best investment strategy. Here are some popular investment strategies to get you started.
Let’s consider you are an active trader willing to take a risk and be completely involved in investment products choices; there are some good strategies:
1- Buy-and-hold investing:
The investors believe that time in the market is wiser than timing the market. The strategy is used by buying investments and holding them off a longer period because the investors believe that long-term returns can be consistent regardless of the volatility of short-term periods. This strategy opposes the market timing, which has investors buying and selling over shorter periods with plans to buy low prices and sell at higher ones. The trading costs are minimized in this strategy because investors argue that holding for longer periods requires less trading. It will result in increasing the overall net return of the investment portfolio. The acquisition of Apple (AAPL) stock is one example of a buy-and- hold strategy that would have worked very well. If in January 2008, an investor bought 100 shares at its closing price of $18 per share, then held onto the stock until June 2020, the stock climbed to $355. That’s almost 2,000 percent return in just over 10 years.
2- Growth investing:
It includes buying shares of companies that don’t pay dividends but appear to grow above-average pace in the future. Such companies offer unique products or services that can’t be easily duplicated by competitors. While growth stocks are surely distant, their appeal is that they can grow in value much faster than established stocks in case the business takes off. For example, Apple is one of the year’s most sought-after growth stocks. Apple achieved a steady, increasing rate of growth at a very fast pace, primarily due to a very brand-loyal consumer base. The organization operates a brand to which customers choose to be associated: not just a commodity, but the brand as a whole. On top of that, innovative and high-quality products and relentless creativity give Apple a competitive advantage over its rivals.
3- Value investing:
It is the value shopping of investment strategies. Investors who chose this strategy purchase what they believe to be undervalued stocks with strong long-term vision as they aim to obtain rewards when the companies achieve their goals in the years ahead. Moreover, value investing requires someone active and willing to keep an eye on the market for clues to know the undervalued stocks at any given time. For example, if the company had a share price of $100 last week and $50 this week, you can get twice as many shares this week for the same amount of money. If you put the same value on the business this week and last — you get more value for money now.
4- Momentum investing:
The investors of this kind of strategy believe that winners keep winning and losers keep losing. They think that losers will continue to drop. Therefore, they might choose to short-sell their securities, which might lead to a risk. Traders who choose this strategy must stay ready to buy and sell at all times. Profits build in months instead of years. So, this is opposite to the buy-and-hold strategy, which has an approach to set it and forget it. Profits from momentum investment are lucrative to make. Say you buy a stock, for instance, that grows from $50 to $75 based on an overly positive analyst report. You then sell at 50% profit until the stock price corrects itself. Over the span of a few weeks or months, you’ve made a 50% return (not an annualized return). Over time, the increase in profit potential can be staggeringly large through the use of momentum investment.
If your financial goal is retirement or education for your children, and you don’t want to be involved in your portfolio management, then these are the options for you:
A. Mutual funds:
A mutual fund is a professionally managed open-ended fund that allows investors to pool their money to access a range of investments that would not be possible to invest in directly. An open-ended means fund can issue and cancel shares at any time. Let’s look at the main benefits that this pooling of resources brings to investors:
The main goal of diversification is reducing risk. For the average small investor, creating a diversified portfolio can cost a fortune, so, in this case, mutual funds can be a smart and cost-effective way of investing. If, for example, an investor has only $2,000 and wants to invest in different companies, investing in mutual funds will be the smartest way to do it.
b) Professional Investment Management:
As a mutual fund investor, you can access the investment skills of a professional fund manager, that continuously reviews your portfolio. Professional portfolio managers and analysts have the expertise and technology resources needed for research companies to analyze market information before making investment decisions. Fund managers carefully identify when and which securities are to be purchased and sold through individual security assessments, sector allocations, and technical factors analysis. It can potentially be invaluable for those who have neither the time nor the expertise to supervise their investments.
c) Liquidity and Security:
All mutual funds allow you to buy or sell your fund shares once a day at the NAV fund’s close of the market. You can also reinvest dividend income and capital gain dividends automatically, or make new investments. The minimum initial investment needed for most mutual funds can be significantly less than what you will need to spend to create a diversified portfolio of individual stocks.
Investing in Mutual Funds Is a Smart Decision with a Large Number of Benefits, Though It Is Not Always Very Cost-Effective Several fees can be applied to mutual funds. It is operating a mutual fund costs different transaction fees, like management fees and annual operating expenses. Most funds come with buy and sell transaction costs or fees known as loads. And some funds charge a fee for redemption if you sell shares that you only owned for a short period. Investors must pay recurring expenses to cover the cost of managing the fund; this includes investment management fees (paying the fund manager and research staff), and trading costs related to purchasing and selling shares within the fund.
An index fund is a mutual fund, built to effectively track different components of a market index (a group of securities representing a market segment). In general, an index fund imitates the financial index’s performance and composition, and pursues a passive investment approach. For example, it is measured by the S&P 500 Index Fund, while the Nasdaq Composite index would follow all 3,000 stocks listed on its exchange.
Thousands of index funds are available on the market and vary according to the indices they track. Index funds are eligible for a wide variety of investments beyond stocks, including investment in various industries including real estate, assets, debt, and insurance. Many mutual index funds buy small stocks while others buy thousands of different stocks. Regardless of the index they follow, an index fund’s main goal is to suit the underlying index results.
You get a diversified portfolio of securities in one simple, low-cost investment when you buy an index fund. Most index funds have a single fund exposure to thousands of shares, which reduces the overall risk by large diversification. You can build a portfolio that matches your desired asset allocation by investing in multiple index funds tracking various indexes. You may, for example, put 60 percent of your money into equity index funds and 40 percent into bond index funds.
Robo-advisors are software products that can help you manage your investment without consulting a financial advisor or self-managing your portfolio. Usually, you open a robo-managed account and then provide basic information on your investment objectives through an online questionnaire. Robo- advisors will then combine the data you provide to provide an asset allocation approach and build a portfolio of diversified investments for you that meets your target allocation percentage for those investments. Here’s why a robo-advisor can be a great tool when investing in uncertain times:
a) Rebalance Your Portfolio Automatically:
The best way to control the amount of risk that you take on as you invest is to allocate your money across, and within, stocks and bonds. Yet the proportion of your overall portfolio that is allocated to other bonds or stocks will inevitably adjust along with it as the markets move. Most robo-advisors provide automated rebalancing to get the portfolio back to its original allocation. Wealthface, for instance, rebalances your portfolio quarterly for free and adjust your holdings to the market situation.
b) Help You Remain Disciplined:
Efficient investments rely on discipline. Time on the market is more important than timing the market; it is one of the core investing principles. Markets have been up and down on consecutive days — plus or minus 10 percent on consecutive days — which creates a lot of anxiety among investors. Robo-advice platforms are helping to deliver the discipline.
c)Provide a Bridge Between Impulses and Investments:
Most of us are investing with common goals in mind, whether it is to retire comfortably, pay for a child’s college education, or simply create wealth. It’s tempting to act on emotions and make adjustments to our investments without thinking strategically or rationally, as we watch the markets rise and fall. But if your goals have not changed, then your investment strategy is probably not supposed to change either. Robo-advisers help build a necessary barrier between our instincts and our investments.
After You’ve Identified Your Strategy
Now, you have a plan narrowed down. Fantastic! But there are still some things you will have to do before making the first deposit to your investment account.
First, figure out how much money you need to invest. That includes the amount you can deposit and how much you can continue to invest in the future. You will then have to decide on the best way to invest. Should you go to a conventional financial advisor or broker, or is a passive, worry-free method more appropriate for you? If you choose the latter, consider signing up with a robo-advisor. It will help you work out the expense of investing from management fees to commissions you need to pay your broker or advisor.
Finally, it would be best if you were prepared to deal with whatever path you choose. Choosing a strategy is more critical than getting the strategy itself. As long as the investor makes a choice and commits to it, any of those strategies can generate significant returns. The reason it’s necessary to choose is that the earlier you start, the greater the compounding effect.
Remember, when choosing a strategy, don’t focus exclusively on annual returns. Engage the strategy that suits the schedule and the vulnerability to risk. Ignoring those aspects can lead to a high rate of abandonment and often changing strategies. As discussed above, various adjustments produce costs that eat away at your annual rate of return.