What exactly are investment strategies?
According to Investopedia they are “a set of principles designed to help an individual investor achieve their financial and investment goals.”
They are the guidelines and plans that shape your investment decisions and the logic behind them.
There are different kinds of investment strategies. Which strategy you go with and the particulars of that strategy are dependent on your goals as an investor, the potential needs for capital, and your risk tolerance. Investment strategies, depending on your goals and who you are, can be highly aggressive which translates to higher risk or more conservative and thus lower risk.
Four types of investment strategies commonly practiced
Type 1- Value Investing
Investopedia refers to value investors as ‘bargain shoppers’ but not in a derogatory way. When you engage in value investing you seek out stocks that might be undervalued. Stocks with a current market value that you do not believe reflects the actual or potential value of that stock. A good portion of value investing hinges on the idea that the markets do not operate purely on rationality. That there is some irrationality and errors in judgement (for whatever reason) at play.
The most famous value investor is Warren Buffet.
To be a value investor means doing a lot of research. Not necessarily combing through mountains of data and financial records but certainly developing a comprehensive understanding of companies’ fundamentals. In addition to research this investment strategy requires patience. As Wall Street Survivor points out it may take months or years for a stock you purchased according to this strategy to rise in value. But, all things going well, it can reward that patience.
Type 2- Income Investing
Wall Street Survivor calls this strategy “a great way to build wealth over time.” Income investing means purchasing a security or securities that generate returns at regular intervals. The most prominent example of such a security are bonds. In addition there are real estate investment trusts (REITs), dividend paying stocks, mutual funds, and exchange-traded funds.
Type 3- Growth Investing
Growth investing revolves around capital appreciation. According to Investopedia a growth investor looks for investments with “strong upside potential.” Meaning you will have to examine a stock’s potential to grow and its earnings to become greater in the future. Growth investing is NOT reckless speculative investing. Integral to this strategy is the research that determines how healthy a stock is in addition to its growth potential.
If you decide to be a growth investor, that entails checking to see if a company has experienced above-average-growth as measured by profits and revenues. This is still the case, as stated by Wall Street Survivor, if a company’s share price seems expensive according to price-to-book or price-to-earnings ratios. The most famous example of a growth investor is Peter Lynch.
Type 4- Dollar-Cost Averaging
This investment strategy (sometimes shortened to DCA) involves placing consistent investments into the market over a period of time. Using this strategy does not preclude you from using other strategies, including those mentioned here.
This is perhaps one of the easiest strategies to put into practice thanks to modern technology and arrangements that allow for the automation of the investment process. Dollar-Cost Averaging requires you to:
Decide on the total sum you will invest
Determine the period of time the regular investments will occur
Choose the frequency of stock purchases