Your investment strategy is like a plan for how you will build your portfolio. It is important that you find a financial advisor that is a good fit for your objectives and situation in life. A 25-year-old should have a different strategy than a 65-year-old.
We often forget to plan for our investment strategy and growing old, which is the most important plan of all.
If you don’t have a plan for investing your money, it’s like a football team going into a game without a playbook. Although you are not required to have an investment strategy, having one significantly improves your chances of winning.
After you have learned some of the basics of investing in the stock market, such as how to read stock quotes and how to buy stocks, your next step should be to create an investment strategy.
The Importance of Defining Your Investment Strategy
Most financial planners agree that the following are the beginning steps to a successful investment strategy:
- Stop paying high interest rates on credit cards and other debt.
- Try to save 10% of your income
- Have at least 3 months of expenses saved in cash
- Invest a fixed dollar amount each month in the stock market
- Plan on investing in stocks for at least 5 years
If you are ready to invest in the stock market, what stocks should you buy?
An investment strategy is like a set of instructions that guide you through the investment process. This will allow you to eliminate investment options that are likely to have negative long-term outcomes or that are inconsistent with the objective you’re hoping to achieve.
It is important when creating an investment strategy to have a clear understanding of what you want to achieve. This can be done by quantitatively assessing your goals. Trying to make money or become wealthy without a plan is not helpful.
The goal should be to receive an annual return of 8% on investment contributions over the next ten years, resulting in a portfolio of $200,000 that could be used to purchase a second home.
The more specific the objective, the better. And it doesn’t stop there. An investment strategy is pointless unless you understand it properly.
There is no single stock investment strategy that is right for all objectives. The key is to match the right strategy with the right objective.
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Types of Investment Strategies
1. Value Investing
One of the most popular investment strategies, especially for beginners, is value investing.
The principle behind value investing, made popular by Warren Buffet, is to buy stocks that are cheaper than they should be based on their long-term earnings potential.
To find stocks that are underpriced, you need to do a lot of research on the fundamentals of the underlying companies. Once you find a good stock, it may take some time for the price to go up.
This investing technique requires you to buy a security and hold onto it for a few years. It’s a good strategy for beginners because it doesn’t require active management.
Although the stock market has averaged an 8% return over the past century, there are still investors like Warren Buffet whose individual stock picks have outperformed the market in the long run.
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2. Income Investing
Income investing generally refers to buying securities that pay out returns on a regular schedule. Over time, this can be a great way to build wealth.
Different types of fixed income securities include bonds, dividend paying stocks, exchange-traded funds (ETFs), mutual funds, real estate investment trusts (REITs), and other Investment funds.
Fixed income investments are a type of investment that provide a reliable income stream with minimal risk. They should comprise at least a small portion of every investment strategy, depending on the amount of risk the investor is looking to take.
3. Growth Investing
An investment strategy that focuses on capital appreciation. Growth investors seek out companies that have high growth rates in revenue and profits, even if the stock price seems expensive when looked at through metrics such as price-to-earnings or price-to-book ratios.
Peter Lynch’s investment style is similar to that of Warren Buffet in that they both focus on finding companies that are undervalued by the market.
Growth investing involves investing in smaller companies that have the potential to grow quickly, as well as in well-known companies and emerging markets. This strategy is riskier than some others, but has the potential for higher rewards.
4. Small Cap Investing
A more risky investment strategy for those who want to add more risk to their portfolio. Small cap investing involves purchasing stock of small companies with smaller market capitalization.
Small Cap stocks are an attractive option to investors because they are not well-known. Large-cap stocks often have higher prices because more people are paying attention to them.
Small cap stocks tend to have less attention on them because investors stay away from their riskiness and institutional investors (like mutual funds) have restrictions when it comes to investing in small cap companies.
Only experienced stock investors should consider small cap investing, as these stocks are more volatile and difficult to trade.
Socially Responsible Investing
Investing in a stock portfolio of companies that are environmentally and socially responsible while still being competitive with other types of securities in a typical market environment is called socially responsible investing.
People today expect companies to care about more than just making money. They want companies to be socially responsible, and they are willing to invest their money in companies that align with their values. SRI is a way of investing that not only has the potential to make money, but also has the added bonus of benefiting everyone involved.
Strategies for Approaching Buying And Selling Investments
You can choose to either buy-and-hold or dollar-cost average your investment assets, as passive investment strategies. Active investment strategies are those in which the investor attempts to achieve a return that exceeds the return of the benchmark index through the proactive selection of individual investments.
Momentum investing is a common active investment strategy in which the investor attempts to achieve a return that exceeds the return of the benchmark index through the proactive selection of individual investments.
1. A Buy and Hold Strategy
Both approaches to investing mentioned here are founded on the idea that being invested in the market for a longer period of time will generate higher returns than trying to time the market.
So, investors who don’t actively manage their portfolios often keep them pretty steady regardless of the ups and downs markets see over the short term. They do this by avoiding market timing and frequent asset buying and selling to minimize costs.
A buy and hold strategy for investing involves buying an asset and holding it for at least seven years. There is no defined event or opinion that will cause someone to abandon their current course for something else.
2. Dollar-Cost Averaging Strategy
Dollar-cost averaging is the practice of making regular investments over time regardless of market conditions, which is the opposite ofinvesting only when conditions are favorable. Making systematic and continual investments rather than attempting to time the market helps to avoid making unlucky decisions.
If you are investing regularly, you can buy when prices are high and low, which will reduce the amount of risk you are taking on and the effects of price fluctuations.
3. Momentum Strategy
The active approach here means timing the market. Active investors try to do better than the market by guessing what will happen to the prices of stocks and other assets in the future.
An active trading strategy where investors use technical analysis or moving average analysis to look for buying opportunities when the share markets trend upwards in the short-term is called momentum investing.
They then sell when the investments start to fall in value, hence the name of the strategy. The challenge being trends continue…until they don’t. That is near impossible to see without hindsight.
The Active vs Passive Investing Debate
There has been debate among investors about whether active or passive investing is better in terms of benefits and costs. Active investing is a more hands-on approach that involves making frequent buying-selling decisions.
Active investors/managers can get rid of investments that are not doing well and replace them with new or well-performing stocks. They can also get out of specific holdings or market sectors when the risk gets too high.
However, flexibility does come with higher costs. Active investing costs more money than passive investing because you have to pay people to pick investments for your portfolio.
There are also additional costs associated with more frequent trading, like higher transaction costs.
A majority of active investors and managers are unsuccessful in outperforming the appropriate index after taking expenses into account.
We want to believe that some people can consistently outperform the average, even when research proves otherwise.
Investment Strategy Importance
When there is a lot of economic uncertainty and the market is unstable, investors often make decisions based on their emotions instead of logic. People tend to overreact and are tempted to sell assets at low prices when the economy is not doing well.
Investment strategies can help you ignore your emotions, block out market noise, and focus on long-term goals.
A drop in the market in reaction to some catastrophic events will not have a big impact on the results of a well-designed investment strategy in the long term.
Take the 2008 financial crisis as an obvious example. The S&P 500 fell by 46.3% from October 2007 to March 2009. Despite the setback, the index had made a full recovery by March 2013. This run began in 2009 and lasted until 2019, resulting in a 250% increase.
As soon as something bad happens, like the 2008 financial crisis, the media jumps on it and starts broadcasting how terrible it is. This scared a lot of people. This is in contrast to positive market news that gradually and undetectably increases valuations.
An investment strategy is a plan that helps you make decisions about investments.
There is no need to panic or second-guess yourself, just assess where you are today and where you want to be. The above text is asking if the current strategy being used is the right one to achieve the goal, and if it needs to be changed.
No matter which path you decide to take- whether it be active, index, or a combination of the two- we urge you to stay consistent. It is important to not let your emotions guide your decisions while you are working on something.
To summarize, we have listed some principles that you might find helpful to define your investment strategies:
“It’s never too late to start,” is the famous quote (in other words, don’t delay or wait) and then contribute regularly.
You don’t need to worry about timing the market if you’re buying regularly, because you’ll be buying at the highs and lows and averaging out the cost of your purchase. Tools such as auto-invest can help with this.
Keep costs and trading costs will destroy your returns. You will want an investment provider or platform that will use all of your money if you are regularly contributing. At Kernel, you will never have to pay a transaction fee on an order!
Diversify, diversify, diversify
Creating an investment portfolio that is composed of a variety of investment types that have dissimilar behavior. An investment in a single diversified index fund, like the NZ20 or Global 100, can provide you with the diversity you need.
Or you can combine across asset classes. You can also think about your exposure to different types of investments and future trends. Putting money into things you can’t control is like gambling.
Consider “the best of both worlds” approach via a core-satellite strategy
The majority of the portfolio is dedicated to diversification in order to reduce risk, with the remaining part offering the opportunity for higher returns.