In today’s ever-changing economy investors need to have some form of investment strategy or plan in place. With markets constantly changing, investors need an investment strategy that allows them to make the most of opportunities when they arise, but most importantly, to reduce the level of risk you are exposed too. Ideally, you need an investment strategy that allows you to pivot to suit your risk, tolerance or schedule.
For those who are new to investing, this piece will act as a guide for everything to do with investment strategies.
What is an investment strategy and what should you consider?
This is one of the most common questions new investors have when they enter the market.
In short, an investment strategy is what guides investors to secure long-term income capital growth based on several factors including, risk, tolerance and future capital needs. Investment strategies define the plan for future growth, whether this is rapid growth where an investor focuses on capital appreciation, or they can follow a low-risk strategy which prioritises wealth protection in the long run.
Before you choose an investment strategy, you must gather some necessary information about your current financial situation and where you would like to be. Such questions include:
- What is the current financial situation?
- How much can you afford to invest – initially and on an ongoing basis?
- What returns are you expecting? What are your goals
- What is your time frame?
- What level of risk can you be exposed to?
Before we explore how strategies can take shape, you must understand what levels of risk you can expose yourself to. The level of risk you can be exposed to is usually determined by a select grouping of factors including, how much you want to invest, what you want to invest in, the speed of returns, your current income.
Understanding your level of risk is a vital component to consider when investing. Not only will it allow you to work out how you may react to large swings in your investments. It provides a realistic approach to what you can afford long term.
For those who are unsure what risk means for your investment – the greater the risk the chance to receive higher returns, while lower risk will naturally mean your growth or returns will take longer to materialise.
Types of investment strategy
Investment strategies can take shape in a number of ways. The best investment strategy will be different from person to person; it all depends on the needs and wants of the investor. Here are three common investment strategies for you:
Often described as a long-term investment strategy, value investing is seen to be relatively low risk as investors seek stocks they believe are currently undervalued, in theory presenting investors with the opportunity to get a stock at a discounted price. This form of investment strategy requires a considerable amount of groundwork in researching the correct stock selection and be willing to see the stock slowly grow to stand any gain.
Growth Investment strategies solely explore investments that offer strong upside potential when it comes to the future value and earnings of stocks. Growth investing is not as reckless as it sounds, growth investing revolves around the evaluation of a stock’s current health, strength as well its potential to grow in the coming months or years. A growth investor’s decisions will naturally consider the prospect of the industry they are looking to invest in.
If there is evidence of widespread potential and considerable room to grow, an investor may choose to invest. In short, a growth stock should consistently be growing and the company should have a consistent history of strong earnings and the capacity to deliver and grow. Other form of growth investments can take shape in the form of fixed-term investments or bond investments.
Momentum investment strategies solely look at the current market trends of stocks. Momentum investors look to buy stocks experience an uptrend in performance and value. While momentum investing may provide the potential for significant returns, it is one of the riskiest forms of investment strategies that can result in significant losses if predictions are wrong or the stock quickly falls.
One of the more significant elements of momentum investing, which gets pushed to one side is the practice of shorting. An extremely aggress tactic used by traders, this technique allows an investor to profit from a drop in anstocks price. It is important to note shorting a stock is an incredibly risky prospect and be financially damaging.
Interesting related article: “What is a Portfolio?“