What Are Some Basic Investment Strategies?
From growth to value and more, there are several approaches to take with your portfolio. Which one is right for you depends on a few factors.
Every investor, professional or otherwise, will typically have an investment strategy underpinning their decisions. If you’re putting your money and financial future on the line, you need to consider your financial goals and what you’re looking to achieve.
Let's look at a few possible approaches.
Types of investment strategies
Growth investors target companies that are ambitious, on the rise and poised to generate better-than-average profits. These companies have a solid track record of growth, a history of outperforming internal and external expectations, and plenty of potential to significantly expand revenues and profit margins.
These qualities are often deep-rooted in businesses that reinvest their takings, rather than pay dividends to their shareholders, and supply a unique product or service that is revolutionary, in high demand and not easy for competitors to duplicate.
Sounds perfect, right? But that is part of the problem. Companies that belong to this exclusive club likely already have a big fan club – and a hefty price tag to match. Expensive stocks have to do a lot better in the future to justify their current valuation and are at risk of tumbling hard if they encounter even a minor setback.
Value investors are concerned with hunting down bargains – companies whose share price doesn't reflect their true worth. They believe these valuations fail to reflect a business' long-term fundamentals.
Often this approach involves identifying shares that are unglamorous or have fallen out of favour and have the capacity to bounce back. Should the identified bargain turn a corner, other investors will likely start buying it again, bidding up its share price.
Value opportunities like this aren’t easy to come by, though. Shares are normally cheap for a reason, and companies trading at a discount could find themselves in a deep hole that’s hard to dig out of.
Income investors structure their investment portfolio to provide them with a regular income. Equities make money in two ways: capital gains and dividends. Income investors are mainly concerned with the latter.
This category of investor looks for companies that regularly allocate a portion of their earnings to shareholders, and have enough money tucked away to comfortably afford to do so – a space typically reserved for large, mature businesses that generate lots of cash and operate in industries that aren’t rapidly expanding: think banks and utilities.
But dividends aren’t guaranteed and, in times of trouble, are often first to get the chop. According to Link Asset Services, three-quarters of UK-listed dividend payers either slashed or completely axed cash returns in the wake of the coronavirus crisis.
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Which strategy could be right for you?
Choosing which one is best for you depends on your individual circumstances.
Generally speaking, growth investing caters to long-term investors with a “no pain, no gain” attitude; the income approach is suited to cautious individuals who may need to access their savings over a shorter time frame; and value investing sits somewhere in the middle.
Can I mix and match investment strategies?
Strategies can be combined, and in many cases could work harmoniously together.
Value should be a key focal point, regardless of whether it’s applied to racier growth stocks or those offering income and stability. When you invest, you’re essentially buying an asset in the hope you can sell it on for more later, so the lower price you initially pay the better chance you have of pocketing a nice profit.
There’s also plenty of advantages to investing in funds that specialise in each strategy. Growth, value and income investments usually exhibit different characteristics, which when brought together can reduce volatility and enhance long-term returns.
Should I adjust my investment strategy over time?
It pays to do lots of research before you buy, and then be patient and stick to your plan. The longer you wait, the more time there is to ride out any setbacks and capitalise on gains.
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Investors are, of course, free to make alterations, and you might need to if your financial goals or lifestyle change. Just remember that timing the market is something even the pros can’t get right, and that lots of buying and selling activity often eats into returns.
Remember, Investments can rise and fall. You may get back less than you invest. Past performance is no guarantee of future results.
This is an informational guide and does not constitute advice. The content does not take into account personal, financial and tax circumstances of the reader. Before proceeding with any kind of investment, qualified professional advice should be sought.
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Daniel is a freelance finance journalist. He has written and edited news, deeper analysis features, and opinion pieces for the Financial Times, Investopedia and the Investors Chronicle. Read more