There are strategic approaches to every business move. And investing is no exception. There are more than countable strategies adopted by investors with the aim of making maximum profits and reducing risk as much as possible.
Now whether you are investing in the stock market, real estate, commodities (gold, silver), foreign exchange, etc; here are 10 types of effective investment strategies that investors commonly adopt:
10 Types of Investment Strategies – Choosing the Best
1. Fundamental analysis-: This strategy is an active investment strategy used for researching and analyzing equities. It is one of the oldest and most basic investment strategies. And it simply involves analyzing financial statements with the aim of selecting quality stocks that are worth investing in.
Investors who favor fundamental analysis simply obtain data from financial statements and then compare it with the past and present data of the particular business they are interested in or with those of other businesses within the industry. If they are able to arrive at a reasonable valuation of the company’s stock, they conclude that the stock will be a good purchase.
2. Technical analysis-: Unlike fundamental analysis, this is an objective investment strategy that involves the use of charts to recognize recent price patterns and current market trends for the purpose of predicting future patterns and trends. Technical investors study patterns and trends using cues and signals, known as indicators, to predict future market movement.
3. Buy and hold-: This strategy involves buying investment securities and holding them for long periods of time. Buy and hold investors believe that long-term returns are always reasonable despite the volatility characteristic of short-term periods. They hold that “time in the market” is a better and more prudent investment style than “timing the market“, which is what obtains with short-term investments. The buy and hold investment strategy is an ideal option for those who do not have time for frequent trading and those who expect huge returns on their investments in the long term.
4. Core and satellite-: This is a common, time-tested investment portfolio design that consists of a core investment and many satellite investments. The core investment represents the largest portion of the portfolio, such as a large-cap stock index mutual fund, while the satellite funds are smaller portions of the portfolio added to the core to make up the whole portfolio.
The main objective of the core and satellite investment portfolio design is to reduce investment risk through diversification, while obtaining higher returns than a standard performance benchmark, such as the S&P 500 Index.
5. Value investing-: Mutual fund and exchange trade fund investors employ the fundamental investment strategy or style by using simple stock mutual funds. In other words, the value investor is on the lookout for stocks that are selling at a cheap or discounted price because they want a good bargain. Rather than spend their time searching for value stocks and analyzing companies’ financial statements, mutual funds investors can hold value stocks by buying index funds or exchange-traded funds.
6. Tactical asset allocation-: This investment strategy is a combination of many strategies. It involves actively balancing and adjusting the three asset classes (stocks, bonds, and cash) with the intention of maximizing portfolio returns and reducing risk below the benchmark. The tactical asset allocation strategy differs from technical and fundamental investing because it focuses primarily on asset allocation and secondarily on investment selection.
7. Growth investing-: This involves investing in growth stocks, which typically perform best in the mature stages of a market cycle when the economy is growing healthily. The growth investment strategy shows a clear picture of what corporations, investors, and consumers are all doing simultaneously in healthy economies—spending money to gain increasingly higher expectations of future growth. The key phrase here is to “buy high and sell higher.”
8. Modern portfolio theory-: Investors using this method attempt to take minimal level of market risk to capture maximum-level returns for a given investment portfolio. This explains why investors using this theory often adopt the core and satellite theory explained above. Both strategies are similar in that they both involve diversification.
9. Post-modern portfolio theory-: This investment strategy differs slightly from the modern portfolio theory in the way it defines risk and build portfolio based on risk. While the modern portfolio theory sees risk as symmetrical (the portfolio comprises diverse investments with varying risk levels that combine to achieve a reasonable return), while the post-modern portfolio theory sees risk as asymmetrical (how investors feel about losses is not the exact opposite mirror image of how they feel about gains).
10. Dave Ramsey portfolio-: This strategy was first described by Dave Ramsey, a popular talk show host and widely respected personal investment expert. Ramsey recommends that investments should be divided equally between four types of funds:
- Growth and income
- Aggressive growth