An investment strategy is a defined approach to investing that shapes the choices an investor makes for his or her portfolio. Different investment strategies assume specific tactics based on fundamental beliefs. For instance, value investing seeks stocks that are undervalued and are selling for less than their true worth, whereas growth investing aims to find investment opportunities in companies that have high potential for growth. Those are just a few of the many investment strategies out there to choose from. This guide will break down the major investment strategies and help you decide which of them is likely to be a good choice for you.
How to Choose an Investment Strategy
There are a number of factors that go into choosing the investment strategy that will work best for you. One thing is to think about whether you want to choose an active or passive investing strategy. Active investing involves the frequent buying and selling of stocks. It requires hands-on management, often by a portfolio manager who can delve into various factors to forecast the market.
Passive strategies, on the other hand, are focused on buying and holding investments for the long haul. Proponents of passive strategies argue this cuts down on trading costs and increases tax efficiency. It also tends to be less risky than market-timing strategies, which can reap big rewards by trying to beat the market but also suffer big losses. Oftentimes, portfolios will blend active and passive investing.
Other factors you need to consider are your time horizon, such as how close you are to major life events like buying a house, having children or retiring. If you need income soon, you may not want to select long-term investments, for instance. Your risk tolerance is another consideration. Generally, you can tolerate more risk early in your career, and desire less risky, more stable investments as you move towards retirement. A strategy like income investing, which is based on generating a steady income, might be less risky than more subjective strategy like value investing.
Growth investing is an investment strategy that focuses on building capital through buying equities that have the potential to increase in value. This is most commonly found in stocks where investors believe the value of the company, and thus the value of the shares they’ve purchased, is likely to go up.
Growth investing contains several sub-strategies. Two of the most common are short-term investments and long-term investments. Short-term generally means buying stocks and holding them for less than a year. Investors use short-term growth investments when they think a company’s value is likely to shoot up quickly. Long-term investments, on the other hand, are held for more than a year. Investors use these when they believe the company’s value will grow slowly and steadily over the years.
Growth investing can touch on numerous sectors, such as:
- Emerging markets
Value investing, an investment strategy championed by Warren Buffett, focuses on seeking out stocks that you believe are intrinsically undervalued. By finding companies the market does not properly value, investors have the potential to post big gains when the market eventually corrects and the company becomes valued properly. This is a very subjective type of investing.
Income investing focuses on generating a steady income from your investments. Rather than seeking stocks that will grow in value and give your portfolio more hypothetical value but make you no richer in terms of cash, income investing wants to find investments where your portfolio sees real-world value in the form of money in your pocket.
Income investments generally take two forms. The first is stocks that pay dividends. Some companies pay their investors a percentage of profits in the form of a dividend. That is cash that goes into your account if you own stock. The other investment common to income investing is bonds, which pay out on a consistent basis.
Socially Responsible Investing
The previous investment strategies focus more so on how an investor makes money. This investing strategy is a bit different in that it takes a broader look at how your investing can impact the world at large, beyond your portfolio.
You can tailor a socially responsible investing strategy to what you personally care about when it comes to social responsibility. If you are an environmentalist, for instance, you might invest heavily in green companies and avoid investing in companies that deal in fossil fuels. If you care about foreign policy, you might avoid companies that do business in certain countries.
Halal investing — investing done following Islamic principles — is another form of socially conscious investing. This means, among other things, not investing in companies that deal in alcohol, gambling or pork products.
Small Cap Investing
Small cap investing focuses on companies with a market cap — that is, total value — between $250 million and $2 billion. This means you don’t invest in the companies that many investors focus on (think Apple, Ford, IBM, etc.) and instead on smaller companies you think could do well in the future.
Small cap companies often have few shares available for public purchase. Because institutional investors generally don’t want to own too big of a percentage of a company, they might shy away from the companies, giving individual investors a leg up.
The Bottom Line
There is no easy way to pick which investing — strategy you should choose when building your own portfolio. You might end up with a mix of sorts. For instance, you might primarily build your portfolio around growth investments, but include some income investments as a way of guaranteeing yourself some more cash you can either use in your everyday life or reinvest to increase your income generation.
The best way to pick an investing strategy is to think about your financial and personal goals. Then figure out which strategy is most likely to help you achieve those goals.
- If you’re wondering what type of investing strategy is right for you — or if you simply need help implementing it — you may find it helpful to talk to a financial advisor. It is crucial to find the right advisor your you, though. SmartAsset can help with our free financial advisor matching service. All you’ll have to do is answer a few questions about your finances. Then, we will match you with up to three financial advisors in your area. We’ve fully vetted them all and made sure they are free of disclosures. Each of your matches will get then reach out to you to discuss a plan.
- Not sure what the right mix of investments is for your portfolio? This asset allocation calculator can help you make the right choices for your portfolio based on your risk tolerance.
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