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Investment Strategies

You know what you want to invest in, you know what investment vehicle you want to use, and you know your own individual investment style; now what? Well, you now have to decide what investment strategy to use to build your investment portfolio. An investment strategy is the tactics you use when investing, basically, your plan of attack. It’s a set of rules and procedures which depend on, and in turn guide, your investment decisions, based on your goals and objectives, your risk tolerance and your personality. It’s an overall policy which consists of asset allocation, risk exposure and the principles of buy-and-sell you wish to use in your personal wealth management.

NO STRATEGY

NO STRATEGY


Investors who adopt this ‘no strategy’ investment strategy are also known as ‘sheep’ and are also invariably called ‘Blindfolded Monkeys Throwing Darts’. There is no clear policy or any set objectives, and no short- or long-term plans for their wealth management, just a bunch of random and indiscriminate choices which are not based on logic or information, but instead driven by whim and chance. Not to be recommended when building an investment portfolio but we guess even a broken…

ASSET ALLOCATION

ASSET ALLOCATION


This is based on the modern investment portfolio theory which relies on diversification in order to reduce risk and improve portfolio returns. It refers to which asset class you invest in and it’s an investment strategy which attempts to balance risk and reward by creating a fund whose investment portfolio includes a certain percentage of each of the three main asset classes, stocks, bonds or cash equivalents. Deciding on your asset allocation is the most important thing an investor will…

DIVERSIFICATION

DIVERSIFICATION


This is quite simply the process of spreading out your investments to reduce the risk of losing all your money by investing in one security which goes bust. It’s a risk management investment strategy which mixes a wide variety of investments in one investment portfolio so that the positive performance of some investments will make up for the negative performances of others. How much diversification one adopts, and whether you diversify within each market, or within each asset class, or…

ACTIVE v PASSIVE

ACTIVE v PASSIVE


An active investment strategy is one which is usually employed by someone who’s been in the game for a little while and who believes that they have the skills and the understanding to time the market and buy specific investments looking to outperform benchmark indexes. It normally involves the buying of undervalued stocks or short-selling stocks which they believe are overvalued. Not recommended for the novice investor building up an investment portfolio. A passive investment strategy is…

MOMENTUM TRADING

MOMENTUM TRADING


This is, quite simply, an investment strategy whereby the investor selects investments based on their recent history or performance, predicting that they will carry on in the same vein. Investors who employ this strategy when building an investment portfolio do not normally dissect a company’s financial statements or conduct extensive research but are more concerned with any stocks which are featured in the news and which are showing significant movement in either direction. They would…

BUY and HOLD

BUY and HOLD


This is an investment strategy which is more ideally suited to the small individual investors who do not believe that they know enough to try to time the market, in other words to buy when the market is low and then sell when the market is high. They will usually buy company shares in a company which is solid and has good long-term potential, and then hold on to them for a long while, riding out any downturns or periods of volatility in the expectation that, over time, the equity will recover…

INDEXING

INDEXING


Indexing is where you adjust your investment portfolio so that its performance matches that of an index, like the FTSE100 or the S&P500. This is where investors buy a small proportion of all the shares in a particular market index and hold on to them for long periods if they’re employing a passive strategy, or sell quick if employing an active strategy.

VALUE v GROWTH

VALUE v GROWTH


Once again, the differences reflect risk taking or risk aversion while building an investment portfolio. Value investing is a strategy whereby investors will look at a company’s intrinsic value and seek out stocks of companies that they believe are undervalued, where their stock prices don’t necessarily reflect their fundamental worth, due to either the company or the industry having fallen on hard times, or due to a poor quarterly report affecting the company’s stock price; basically,…

DOLLAR-COST AVERAGING

DOLLAR-COST AVERAGING


This simply means that you invest on a type of automated system where you invest the same amount of money in the same investments on a regular basis, regardless of the share price, which means that more shares are bought when prices are low, and less shares are bought when prices are high, thus, eventually, the average cost of the shares will become smaller and smaller. This investment strategy reduces the risk of investing too much in a single investment at the wrong time.

CONTRARIAN INVESTING

CONTRARIAN INVESTING


This takes a long term view of wealth management. Investors will choose what they think are good companies but at a time of down market, and then buy a lot of shares, looking for a long-term high profit. This is an investment strategy which can reap great benefits in times of general economic decline providing that you choose a good company – one that focuses on long term value and the quality of what it offers, one that has a durable competitive edge with its main competitors due to it…

NO STRATEGY

Investors who adopt this ‘no strategy’ investment strategy are also known as ‘sheep’ and are also invariably called ‘Blindfolded Monkeys Throwing Darts’. There is no clear policy or any set objectives, and no short- or long-term plans for their wealth management, just a bunch of random and indiscriminate choices which are not based on logic or information, but instead driven by whim and chance. Not to be recommended when building an investment portfolio but we guess even a broken clock is right twice a day.

ASSET ALLOCATION

This is based on the modern investment portfolio theory which relies on diversification in order to reduce risk and improve portfolio returns.

It refers to which asset class you invest in and it’s an investment strategy which attempts to balance risk and reward by creating a fund whose investment portfolio includes a certain percentage of each of the three main asset classes, stocks, bonds or cash equivalents. Deciding on your asset allocation is the most important thing an investor will decide as it’s considered more important to decide which asset class to invest in as opposed to which individual security. Each of the asset classes has different levels of risk and return so the percentage of each one for each investor’s portfolio can be adjusted to reflect that investor’s goals and risk tolerance.

Dynamic asset allocation involves setting specific target allocations for each class and constantly re-balancing your investment portfolio when the original allocations stray too far from their initial settings due to wavering returns, thus selling off from an asset class which has outperformed another in order to keep the original percentage the same.

DIVERSIFICATION

This is quite simply the process of spreading out your investments to reduce the risk of losing all your money by investing in one security which goes bust. It’s a risk management investment strategy which mixes a wide variety of investments in one investment portfolio so that the positive performance of some investments will make up for the negative performances of others. How much diversification one adopts, and whether you diversify within each market, or within each asset class, or diversify in investing in different asset classes, will depend on the individual investor. Most studies have proved that a well-diversified portfolio will yield the most cost-effective level of risk reduction in wealth management. It makes sense as an instrument of risk control since it allows for major events to influence one security, asset class or market, in the knowledge that other securities will probably not be influenced at the same time.

ACTIVE v PASSIVE

An active investment strategy is one which is usually employed by someone who’s been in the game for a little while and who believes that they have the skills and the understanding to time the market and buy specific investments looking to outperform benchmark indexes. It normally involves the buying of undervalued stocks or short-selling stocks which they believe are overvalued. Not recommended for the novice investor building up an investment portfolio.

A passive investment strategy is one where the investor likes to buy and hold on to stocks over a long period of time and where passive indexing is used to minimize the transaction costs of each investment. They would expect a return that closely replicates the investment weighting and the returns of the benchmark index, and the idea is to minimize investing fees and avoid the negative consequences of incorrectly predicting any future downturns or upturns in the market. Usually investors will buy and track an index fund; this way their investment portfolio gets good diversification, low turnover and minimal management fees.

MOMENTUM TRADING

This is, quite simply, an investment strategy whereby the investor selects investments based on their recent history or performance, predicting that they will carry on in the same vein. Investors who employ this strategy when building an investment portfolio do not normally dissect a company’s financial statements or conduct extensive research but are more concerned with any stocks which are featured in the news and which are showing significant movement in either direction. They would normally only hold on to those stocks for a few minutes, hours or maybe a day. Obviously not as sophisticated or calculated a strategy as one would hope for but one where each day can bring about new promise.

BUY and HOLD

This is an investment strategy which is more ideally suited to the small individual investors who do not believe that they know enough to try to time the market, in other words to buy when the market is low and then sell when the market is high. They will usually buy company shares in a company which is solid and has good long-term potential, and then hold on to them for a long while, riding out any downturns or periods of volatility in the expectation that, over time, the equity will recover and show profits. This strategy is ideal for the low risk, long term investor who has done their homework and believes strongly in a certain stock or company.

INDEXING

Indexing is where you adjust your investment portfolio so that its performance matches that of an index, like the FTSE100 or the S&P500. This is where investors buy a small proportion of all the shares in a particular market index and hold on to them for long periods if they’re employing a passive strategy, or sell quick if employing an active strategy.

VALUE v GROWTH

Once again, the differences reflect risk taking or risk aversion while building an investment portfolio.

Value investing is a strategy whereby investors will look at a company’s intrinsic value and seek out stocks of companies that they believe are undervalued, where their stock prices don’t necessarily reflect their fundamental worth, due to either the company or the industry having fallen on hard times, or due to a poor quarterly report affecting the company’s stock price; basically, they’re looking for diamonds in the rough. Experts look for what they refer to as a “margin of safety” whereby the price a company is trading at is less than its intrinsic value, or the value of future cash flows. Value investing focuses more on safety rather than growth, with companies using their earnings in order to pay out high dividends thus producing more current income than growth, while also offering the potential for long-term growth. This is a less risky investment strategy than growth investment.

Growth investment is when investors focus on companies which they believe will experience a higher-than-average growth in terms of revenues, earnings or cash flows, and which companies often use their profits to re-invest in more acquisitions rather than paying out high dividends. Investors will look for companies whose stocks tend to have above market price-to-earnings and price-to-sale ratios. They represent the potential for higher returns in the long run and tend to do better than the market when stock prices in general are rising, but they also represent a greater risk to investors than Value Investing.

DOLLAR-COST AVERAGING

This simply means that you invest on a type of automated system where you invest the same amount of money in the same investments on a regular basis, regardless of the share price, which means that more shares are bought when prices are low, and less shares are bought when prices are high, thus, eventually, the average cost of the shares will become smaller and smaller. This investment strategy reduces the risk of investing too much in a single investment at the wrong time.

CONTRARIAN INVESTING

This takes a long term view of wealth management. Investors will choose what they think are good companies but at a time of down market, and then buy a lot of shares, looking for a long-term high profit. This is an investment strategy which can reap great benefits in times of general economic decline providing that you choose a good company – one that focuses on long term value and the quality of what it offers, one that has a durable competitive edge with its main competitors due to it controlling the raw material source or having a market ‘branding’ position thus it’s not vulnerable to competition, one that is flexible and can adjust its prices for inflation, and one whose earnings are on an upward trend with consistent returns on invested capital.

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