Investment strategies are plans guiding your investment decisions, based on your financial goals, risk appetite and time horizon. As such, they are not a one-size-fits-all exercise with your investing goals determining what’s appropriate for you.
This week we ran through the strategies of some of the world’s most famous investors, including Warren Buffett and Cathie Wood.
The takeaway was that while each shared some solid fundamentals (thinking long-term for example) there are many different ways to invest. Each strategy has its advantages and disadvantages and each can produce very different results in different markets.
The discussion was a good reminder that no matter your style, it’s important you find a strategy with which you’re comfortable.
With that in mind, here are six different investment strategies. While not all are mutually exclusive, they give an insight into the different ways an investor can approach the market.
1. Value investing
Everyone loves a bargain. Value investors look for companies they believe are undervalued by the market with a good long-term outlook. The theory goes that when the business realises its full potential, the market will correct itself and the investor will reap the rewards.
But it’s not just about finding bargain basement deals. Rather it is an investment style that stresses quality. As the most famous value investor Warren Buffett says, “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
As you may imagine, this requires a lot of research. After all, some businesses are out of favour for good reason. To separate the wheat from the chaff, you will likely have to do your homework on dozens of stocks, comparing a company’s growth prospects with its stock price as you hunt for a mismatch.
2. Growth investing
On the other end of the scale are the growth investors. They aren’t looking for discount shares, but companies they think will grow at an above-average pace in the future. Often, these shares come at a premium – one a growth investor will pay if they believe the upside potential is strong enough.
This is more akin to Cathie Wood’s strategy where she is investing in innovation that she believes will grow enormously over the next decade, from electric vehicles to artificial intelligence.
These kinds of stocks often pay little to no dividend as they often spend big to chase future growth opportunities and markets.
3. Income investing
Other investors don’t focus on capital growth at all. Instead, they look for investments that can generate a steady, passive income – be this a cash dividend or fixed-interest from bonds. If you reinvest this income back into the assets that generated them, you can then benefit from compound growth over the long term.
Take for example a stock that pays a regular dividend every year. Investors can use that money to buy more shares and receive an even bigger dividend the following year. Over time, these returns compound with some investors eventually retiring and living off the income.
4. Index investing
Index investing is when you create a portfolio mirroring a particular benchmark stock index such as the ASX 200 or the Nasdaq 100. The most common way to do this is through exchange-traded funds (ETF) that track an index.
Index investors subscribe to the idea that you can ‘beat the market’ so you’re better off just mirroring it via funds that perform in line with the benchmark index (minus fees). Index funds are generally well-diversified making them typically less volatile than individual shares.
5. Buy-and-hold investing
Buy-and-hold investors believe time in the market is more important than timing the market. So they buy shares or ETFs and then hold onto them, regardless of market fluctuations or short-term volatility, and the opposite of more active investment strategies.
6. Active investing
The opposite of buying-and-holding, active investing is a catch-all term for investment strategies in which you trade frequently with the aim of capitalising on market fluctuations.
Active strategies focus on realising short-term profits rather than long-term gains and aren’t for the fainthearted. You need to monitor the market closely, keep a cool head and have a high tolerance for risk.