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Investment strategies are important for any investor, regardless of the size of their portfolio. But what are some of the investing strategies available to investors? And how can you pick one that’s right for your situation and objectives.
Stocks Down Under recaps how investors can decide on an investment strategy and some of the most popular strategies used by investors.
How to decide on appropriate investing strategies
When picking suitable investment strategies, it’s important to understand what type of investor you are. Do you want to make quick profits, or do you prefer a long-term approach, for instance for your Self Managed Super Fund? Are you comfortable taking some risk in exchange for potential rewards, or would you rather play it safe?
Knowing yourself and your goals is the first step in finding particular investment strategies that work best for you. Once you have a better idea of who you are as an investor, it’s time to start researching different investment strategies.
You may want to get help from a specialist
You can read up on different approaches online, speak with a financial advisor, or even join an investment club where experienced investors share their knowledge and experience. Once armed with the right information, compare different investing strategies and choose the one that is appropriate for you.
In this article, we look at Diversification, followed by three pairs of investment strategies that investors can choose between: Growth or Value Investing, Active or Passive Investing and Long-term or Short-term.
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Diversification is the best investing strategy
The most common (and in our view the best) investment strategy is to diversify investments in different asset classes and to practice rebalancing.
Diversifying helps investors reduce their overall risk by spreading out their investments in different stocks, as well as different asset classes such as bonds and property. If done properly, you’ll not only lower your risk, but yoy can maintain your returns at the same level, or even higher. Although it is a strategy in itself, it can be employed in conjunction with several others, meeting different needs of different investors.
Growth or value investing?
Growth and value investing are two different investment strategies that can be employed. They are polar opposites of each another.
Growth investing focuses on stocks that are expected to experience rapid growth in the near future. This style of investing typically involves buying companies with strong potential for medium to long term growth, such as Tech and Life Sciences companies, and newly established businesses in high demand industries.
Growth investors usually look for stocks with low debt, high cash flow and a solid potential for success in their respective markets.
Value investing involves investing in stocks that are undervalued, either due to poor performance or industry trends. This style of investing typically focuses on buying cheap stocks with the potential for increasing long term value, for instance following a restructuring or turnaround of the business.
Value investors look for companies with strong fundamentals such as consistent earnings and also examine the macroeconomic environment to determine which industries are undervalued and have potential for long term growth.
Active and passive investing
This is another pair of investment strategies that are opposites of each another. The main reasons to go with one or the other is how much time you want to spend on researching investment opportunities and whether you think you can beat the market by actively trading individual stocks.
Active investing is an investment strategy that involves selecting individual stocks and securities to buy or sell. This type of investing relies heavily on an investor’s research, analysis and personal judgment.
Active investors actively manage their portfolios by researching the investment landscape and making decisions about when to make trades in order to maximise returns.
On the other hand, passive investing is an investment strategy that involves buying into low-cost index funds, exchange-traded funds (ETFs) that track certain market indices like the ASX 200 or Nasdaq Composite. Buying an ETF or an index fund is sometimes known as index investing.
Alternatively, investors may even build a DIY portfolio that replicates a market index exactly or similarly.
Passive investments are usually managed for long-term growth rather than short-term gains, as there is no active management involved.
Passive investment strategies typically require little effort from the investor. Unless they are building their own portfolio, they simply need to select which fund (or funds) they would like to invest in – the rest is taken care of by the fund manager.
Active investing, meanwhile, requires a substantial amount of research and time to be successful, while passive investing allows investors to take a hands-off approach with minimal effort.
Long term or short term investing
Investors will have different horizons for their desired returns and which of these two investment strategies are employed will depend on an individual investor’s patience.
Some will want quick returns in a few trading days, or even just a few hours. Others will be patient enough to wait several months or years.
Long term investing: Buy and hold
Buy and hold investing is one of the most popular investment strategies used by investors today. This strategy involves purchasing stocks that they expect to perform well over time and holding them for longer periods of time.
This type of investing typically involves buying stocks with good dividend yields and low volatility, as well as focusing on companies that have good management teams and a consistently good track record. Buy and hold investors may also buy stocks during market downturns in order to benefit from the eventual recovery.
A risk here is that something unexpected may happen to the company. Buy and hold investors will try to mitigate this by picking stocks that have historically been resilient to downturns.
Short term investing: Day trading
Day trading involves buying and selling stocks on the same day within the same trading session. It is an active form of investing that requires investors to be constantly focused on the markets.
Day traders attempt to capitalise on short-term price movements in individual stocks or indexes, using Technical Analysis tools.
Day traders typically use technical analysis tools such as trend lines, chart patterns and indicator signals (such as the RSI) to determine when to enter or exit a company.
They also take into account details such as news, volume, volatility and liquidity of the stock being traded. With the right tools, decisions can be made more quickly than analysing fundamentals, such as balance sheets or income statements of companies.
In addition to knowledge of technical analysis techniques, day traders also need access to real-time information about stock prices so that they can make decisions with confidence and execute trades at exactly the right times.
To maximise profits from their trades, day traders must have fast execution speeds and low commissions for their brokerages. Additionally, since day traders are typically looking for short-term gains, they tend to have smaller positions compared to other types of investors.
Traders with this investment strategy may employ derivatives, such as CFDs (Contracts for Difference), instead of buying and selling companies outright, to gain more leverage.
What investment strategies are right for you?
Ultimately, whatever investment strategies investors choose will depend on their individual goals, risk profile and financial situation.
Despite all the differences between investment strategies, all investors have their own different needs and objectives. They should pick a strategy most suitable to their risk profile. And they always do their due diligence on any company in order to make sure they are making wise decisions.
Regardless of which investment strategies you choose, understanding the basics of these strategies and individual company fundamentals can help you as you work towards making money from the stock market.
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