Investment Strategies
Understanding the Different Approaches
By Dylan Rodrigues
When it comes to investing, the same principle is applicable to individual investors as it is to investment managers. You need to identify an investment strategy to follow to make informed investment decisions on a consistent basis. Following the right strategy, or combination of strategies, will help you to stay on course to achieve your investment goals.
Identifying the Most Applicable Investment Strategies
There are various strategies that investors can use when constructing an investment portfolio. Some investors might prefer to follow a single strategy, while others may prefer to use multiple strategies together for a diversified approach. When identifying the most applicable strategy, an investor’s risk and return objectives need to be established, as well as other constraints such as investment time horizons and liquidity requirements. There is no ‘one-size-fits-all’ strategy as everyone has their own unique risks and requirements. This article looks at five of the most common strategies used.
Five Common Types of Investment Strategies
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Value Investing: This strategy involves identifying company shares that are considered to be undervalued. If the share price is trading at a level considered to be below the true value (intrinsic value), this stock is then purchased with the intention to sell it at a higher price once the market recognises this true value.
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Growth Investing: Where value entails looking for undervalued stocks, growth investing looks for shares with the greatest growth potential. Investors focus on future earnings of the company instead of current earnings. Companies with strong expansion potential and opportunities are targeted.
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Index Investing: The two strategies mentioned above are known as active strategies. This is because they seek to outperform the market. The opposite is known as a passive strategy and index investing is an example of this. Instead of trying to outperform the market, you can replicate the performance of any given index, for example the S&P 500. By purchasing an index fund or ETF, you own all the stock in the same composition for a given index.
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Buy and Hold: This approach focuses on long-term investing. You buy shares or securities with a view to hold them for the long-term. The idea behind this strategy is that markets always tend to rise over the long-term, even with short-term volatility present. This strategy also removes any headaches in trying to time the market, which has proven to be one of the most difficult things to do in the world of investing.
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Income Investing: This strategy identifies investments that provide investors with a regular income stream. Examples of this can be in the form of dividends from company shares or interest payments received on bonds. Although the goal might be to receive a steady cash inflow, it is worth noting that dividends are not always guaranteed, especially when companies face financial troubles.
Conclusion
There are various strategies that investors can follow either alone or in conjunction with other strategies. The key to successful investing is understanding the different strategies and how they align to your risk tolerance and return objectives. By doing so, a diversified portfolio can be constructed to help you build and preserve your wealth over time. By consulting with a financial advisor, you can make informed decisions that support your financial future.
For any strategy to work it is critical that the strategy be applied consistently throughout up and down market cycles.
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