An old German proverb says, “what is the use of running if you are not on the right road”. Many investors enter the world of investing with dreams of great success and large profits. However, a lot of them are unable to achieve good returns despite putting in a lot of effort and making regular corrections (changes) to their investment portfolio. The most common reason for this is the lack of a clear investment strategy. Regular changes to an investment portfolio often indicate that the investor does not have a proper strategy.
If you have not yet decided on your investment strategy, do not worry. In this brief article, we will quickly and simply describe various common types of investment strategies. This will enable you to decide on the ideal strategy for yourself and will empower you to invest your way to a prosperous future. Do note that different investors may have different investment goals. Your ideal investment strategy must match your investment goals. Hence, your ideal investment strategy may be different from another investor’s.
Types of investment strategies
Before we begin with the list of investment strategies, do note that all of the following strategies have been used successfully by large numbers of investors. Thus, each of these is a tried and tested strategy (a proven strategy). You may come across many books, blogs, articles, etc. by various experts who propound only one particular strategy and suggest that other strategies are inferior. You must understand that each expert has his or her method of working – including a favourite investment strategy. This does not at all imply that other strategies are ineffective. All of the following strategies are supported by various groups of experts and professional investors. You should, ideally, understand each of these strategies and then assess which one appeals most to you and matches your investment goals. Once you choose your ideal strategy, implement it decisively and stick to it – soon, success will be yours. Let us now begin with the list of investment strategies.
This is a common investment strategy and is regularly used by investors in many different asset classes. The basic principle behind this strategy is to purchase under-priced assets and hold them long enough for the price to increase. Equity investors that follow this strategy often invest in shares of older companies in mature industries. Such industries (and companies) often have small year-on-year growth and hence, may not yield large gains in share price in the short term. Over the long term though, steady annual growth may add up to substantial gain in share price. Real estate investors that follow this strategy often purchase property in established, heavily-populated cities and towns. Again, such investors are essentially looking for long term gain in price rather than short term growth.
Investors who follow this strategy look for high growth in the short term. Growth investors generally target new industries (and young, upcoming companies). For example, in recent times (over the last two to three decades), the information technology industry has grown rapidly. This industry has seen the birth and rapid growth of many companies and thus, has attracted a lot of growth investors. Similarly, real estate investors that follow this strategy often purchase property in new and upcoming townships.
Investors following this strategy look to benefit from various periodic (or momentary) swings in the market. These investors generally seek to beat the market index. With this target in mind, they seek to buy assets just before a surge in their price. Similarly, they aim to sell off assets just before a slump in their price. Thus, timing one’s transactions precisely can be an important challenge in active investing. This is an aggressive investment strategy and it may involve changing one’s investment portfolio and reallocating one’s capital frequently (thus incurring higher transaction costs).
As the name suggests, this strategy is the exact opposite of active investing. Investors that follow this strategy typically aim to purchase some assets and hold on to them for a long time (buy and hold strategy). Value investing can often be a form of passive investing. The fundamental logic behind passive investing is that in the longer term good assets would generate good profits, notwithstanding intermediate periods of decline (drop in price and value). Passive investors may often allocate their capital in order to mirror benchmark indices – in this case, investors aim to get the same returns as yielded by the index in question.
The most ubiquitous feature of this strategy is to seek regular (steady) income – often, monthly income. Thus, investors applying this strategy may choose to invest in bonds that yield monthly interest pay-outs. They may invest in shares of companies that issue regular dividends. They may invest in various government securities that have periodic pay-outs. It is good practice for all investors to put at least a portion of their investment capital in such fixed-income securities. This would ensure that you have a steady income in hand to tackle essential financial liabilities after your retirement.
As the name suggests, investors that follow this strategy aim to beat the market (outperform the market) by doing the exact opposite of what most investors are doing at that point of time. For example, in the equity markets, there are periods when share prices may be very low and a lot of investors may have exited the markets. In such periods, contrarian investors would look to purchase shares of good companies (with the expectation that their price would rise in the long term).
Some investors (typically, more affluent investors) may invest in hedge funds, real estate, commodities, derivatives, etc. These are generally seen as alternative investment classes. Such instruments may often yield positive returns even during periods of decline in the equity markets. Such investments can often be more volatile (many times more volatile) than equity markets and can yield far higher (or lower) returns than the equity market. Thus, these investments can be relatively risky.
These are some of the most common investing strategies. As we have already discussed, you should understand each of these strategies thoroughly and then identify which strategy best suits your investment goals. Do not be hasty while trying to identify your ideal investment strategy. Understand your needs (goals) thoroughly and only then try to choose an investment strategy. If needed, discuss your goals with a professional financial planner and take their help to pinpoint the best investment strategy for you. Do remember always that chopping and changing your investment portfolio too frequently may reduce your chances of getting the maximum possible returns on your investment. It can also lead to higher transaction costs. Hence, take your time in identifying your ideal investment strategy and then follow it diligently. Soon, success will definitely be yours.
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