An investment strategy or style is a consistent and methodical approach to investing. If you don’t have a strategy it will be extremely difficult for you to meet your financial and investment goals once you’ve determined what these goals are. Investment strategies range from conservative to very aggressive depending on your personal set of circumstances, including your age, risk tolerance, available capital, and desired returns. It is important to note that investment strategies are not static and will need to be refined, from time to time, as your personal circumstances change.
Types of investment strategies
• No strategy
The least desirable kind of strategy is one of no strategy. And yet novice investors are tempted to do it, choosing investment opportunities randomly or based on emotions. They know someone, for example, who invested in such-and-such a company so they want to do the same. This is obviously not recommended, because, unless you have the so-called luck of the Irish, outcomes are usually bad because your big money decisions shouldn’t be left to chance. What works for your friend may not necessarily work for you.
• Buy and hold investing
This type of investing, which is also known as passive investing, is one of the most popular because it is pretty simple. It’s long-term, meaning, it involves buying either shares or funds and holding them for a long time. The effectiveness of this strategy will depend on the companies being held. The thinking in this strategy is that equity markets over time give a good rate of return even in spite of periods of market volatility. This strategy takes the point of view that entering the market on the lows and selling on the highs does not work for everyone, especially small investors, because of their inexperience with predicting future market price movements, so better to simply buy and hold. Opting for an exchange-traded fund (ETF) that tracks an index is an option for an investor who is uncertain about which stocks to buy; as well as, when to dispose of same.
• Growth investing
This kind of strategy should be considered by an investor who understands trading technicalities and fundamentals of equities given the heightened risk of loss. Although it’s advantageous, in that it gives exposure to fast-growing and innovative industries and sectors, allowing you to allocate capital to companies that offer the best chance of generating attractively high annual returns, there is always the possibility that these companies don’t live up to market expectations and, therefore, justification for the value of their stock, causing a dramatic correction on their prices.
• Value investing
Value investing, meanwhile, is the opposite of growth investing, in that investors here look at the intrinsic value of a company that they believe to be undervalued — say, as a result of the economy doing poorly and there’s a lot of panic selling occurring — and invest in that company. The thinking here is that you may believe a company’s stock is worth, say $150 but it’s being sold at $50, and you buy it at that price. You’ll stand to make a nice profit of $100 if you hold on until that stock’s price comes up to its true value.
• Dividend investing
Also known as income investing or yield investing, this strategy involves seeking out companies with good dividend yields that will continue to pay dividends each year, even after you draw down on them, and might even increase the payment each year. This can effectively be used for income generation, but you can also opt to reinvest the dividends, rather than cash out, reinvesting in the company’s reinvestment plan and thus benefiting from the compounding of your investment over the longer term.
• Small cap investing
This is essentially a strategy that focuses on investing in the stocks of smaller companies which may more easily be able to grow their profits. Another advantage is that small companies are often overlooked in favor of bigger-name ones that everybody is investing in, and so can trade at a discount until other investors start realizing when these companies have begun being noticed whether by well-placed business news articles or otherwise, narrowing the discount if you’re not an early investor. True, information on these smaller companies may be harder to find so you need to spend more time on research, and this is also an inherent risk. This type of investing is also why the Junior Stock Exchange has expanded so quickly. This is the strategy that investment guru Warren Buffet made money early in his career while combining it with value investing.
For this strategy an investor buys a small proportion of the shares in an index mutual fund that pools money from investors to purchase securities, or an ETF for a specified basket of underlying investments. It can be done passively if you want to hold the shares for a long period, or actively if the index is used to exit the market quickly. There are actually ETFs for all of the investing strategies previously mentioned, making portfolio diversification easy with the added benefit of being professionally managed and therefore reducing your risk.
Investment strategies aren’t one-size-fits all behaviours. And the ones identified above by no means form an exhaustive list. If you’re still unsure of the best one for you, seek out the services of a trusted financial advisor to help you come up with one. Be committed to this year becoming the one that you make serious decisions about growing your money.
Lamar Harris, vice president, wealth management, NCB Capital MarketsRLA