Investment strategies assist investors in determining where and how to invest per their expected return, risk tolerance, corpus amount, long-term and short-term holdings, retirement age, industry preference, etc. Investors can strategize their investment plans according to their objectives and aims.
Therefore, if you’re beginning your investment voyage, it’s essential to study the various investment strategies. Then, you can implement the best strategy for your financial situation and life objectives.
7 Most Common Investment Techniques
Let’s discuss one form of investment strategy after another.
Passive and Active Techniques
The passive strategy entails purchasing and holding securities without trading them frequently to avoid incurring higher transaction costs. Due to the market’s volatility, they assume they can’t outperform it, so passive strategies are typically less hazardous. Active strategies, on the other hand, entail frequent purchasing and selling. They believe they can beat the market and generate higher returns than the typical investor. Nowadays, investing in non-profit organizations is also looked upon as an investment technique.
Traders using automated trading systems (mechanical trading systems, algorithmic trading, automated trading, or system trading) can set rules for entering and leaving a transaction, which a computer carries out automatically.
Investors determine the holding period based on the portfolio value they wish to generate.
How Does Automated Trading App Help
An automated trading app has advantages like
- reduction of emotional trading
- maintenance of the trader’s discipline
- possibility of opening several accounts
- possibility of backtesting
It enables you to increase your stock market profitability. Frequently monitor functionality and performance while using the app. Keep in mind the associated hazards and obstacles.
Investing for Growth (Short-Term and Long-Term Investments)
Investors determine the holding period based on the portfolio value they wish to generate. If investors believe that a company will develop and a stock’s intrinsic value will increase, they will invest in such companies to increase their corpus value. They are also referred to as development investing.
On the other hand, investors will opt for short-term holding if they believe a company will generate positive returns within the next year or two. Additionally, the retention period depends on the preferences of investors. For instance, how soon they need money for a home purchase, their children’s education, retirement, etc.
The value investing method aims to capitalize on the fact that the stock market undervalues firms by purchasing shares at a discount to their true worth. The rationale for investing in such businesses is that a market correction may rectify their undervaluation. The stock price will skyrocket at this point, providing investors with handsome profits upon sale. This strategy is employed by the renowned investor Warren Buffet.
The goal of this approach is not just to raise the value of your portfolio but rather to generate cash flow from stock investments. An investor can earn two categories of monetary income
- Fixed interest income from bonds
Those seeking a consistent income from their investments choose this strategy.
Investments in Dividend Growth
Investors employing this tactic keep an eye out for businesses with a track record of annual dividend payments. Historically dividend-paying corporations are less volatile than their peers and strive to improve their dividend distribution yearly. This dividend type is reinvested by the investors, who get the long-term benefits of compound interest.
This type of strategy enables investors to purchase company securities during market downturns. This approach emphasizes buying low and selling high—the current stock market decline. It typically occurs during a recession, war, disaster, etc.
However, investors shouldn’t simply purchase the stock of any company during a recession. They should look for businesses that can create value and a brand that prevents competitors from entering the market.
This type of investment strategy permits investors to invest a modest proportion of their stock portfolio in a market index. The S&P 500, mutual funds, and exchange-traded funds are examples.
Here are a few investing tips for novices to consider before investing.
- Establish goals: Establish goals for how much money you need in the upcoming period. This enables you to determine whether you should invest in long-term or short-term investments and the expected rate of return.
- Research and trend analysis: Conduct thorough research to comprehend how the stock market and various instruments (equity, bonds, options, derivatives, mutual funds, etc.) operate. Additionally, research and track the price and return trends of the securities you intend to invest in.
- Portfolio optimization: Choose the optimal portfolio from the portfolio pool that meets your investment objective. An ideal portfolio yields the highest possible return with the lowest potential risk.
- Best advisor/consultant: Locate a reputable consulting firm or brokerage firm. They advise you on where and how to invest to achieve your objectives.
- Risk tolerance: Determine the level of risk you’re prepared to accept in exchange for the desired return. This also depends on your immediate and long-term objectives. If you want a greater return in a shorter period, the associated risk will be more significant, and vice versa.
Create a debt, equity, and derivatives portfolio to diversify the risk. Also, ensure that the correlation between the two securities could be better.
Benefits of Investment Strategies
Here are some of the benefits of investment strategies:
- By investing in various categories of investments and industries based on timing and expected returns, investment strategies allow for the portfolio’s diversification of risk.
- A portfolio consists of a single strategy or a combination of strategies, depending on the investor’s preferences and requirements.
- Strategic investing enables investors to obtain the most from their investments.
- Investment strategies assist in reducing transaction costs and taxes.
Limitations of Investment Methods
Here are some of the limitations of investment strategies:
It’s difficult for average investors to outperform the market. It takes them years to earn an average return on their investments, whereas professional investors would make the same return in weeks or months.
Before investing, even though a great deal of research, analysis, and historical data are considered, most decisions are made on a predictive basis. Occasionally, results and returns may fall below expectations, delaying investors’ ability to reach their objectives.
Goal-based investing helps you choose the correct investments and provides clarity.
Top 7 Tips for Improved Investing
Employ Goal-Bbased Investing
Goal-based investing involves choosing investments that help you achieve your goals. You want a vacation or to educate your child. After setting goals, pick an investing choice. If saving for a car is your ultimate aim, you might invest in online mutual funds that blend equity and debt. Goal-based investing helps you choose the correct investments and provides clarity.
Start a Systematic Investment Plan (SIP) Online
Stocks are suitable long-term investments. However, lump-sum equities market investments are unwise if you’re in it for the long haul.
Start a SIP online. SIPs include recurring minor investments. Choose equities or mutual funds for your contributions. SIPs offer
- rupee cost averaging
- compounding returns
- increased return possibilities
You’ve heard the saying, Don’t put all your eggs in one basket, right? Portfolio diversification follows that logic. Investing all your money in one or two stocks in a market downturn leads to capital loss. Diversifying your portfolio is crucial. Instead of investing all your money in one or two companies, buy a basket of equities from different sectors and businesses. Spreading risk reduces the likelihood of all your stocks underperforming in a market downturn.
Only Invest in What You Know
This is another crucial investing strategy. Understand a company’s business model before investing. This helps you assess its performance and growth possibilities. Investing in a firm with a radical business plan you don’t understand is risky and costs you money.
Rebalance as Needed
You choose a combination of investments for your portfolio. Depending on your goals, your portfolio has 40% equity, 50% debt, and 10% fixed income. Asset valuations fluctuate over time. This causes a portfolio imbalance, which hinders your ambitions. Monitoring and rebalancing your portfolio is crucial. If your portfolio is overweight in stock, sell some equities and invest in debt to rebalance.
Save for Retirement
Life after retirement is vital. You lose your primary income and must rely on savings and investments. Thus, early retirement fund planning is critical. Thus, guarantee you’ve enough money to live well after retirement without relying on others or your children. These are some are the best ways to construct a retirement fund.
- Deferred annuity plans
- National Pension System (NPS)
- Public Provident Funds (PPF)
- Long-term equity funds
‘If you’ve to do everything by yourself, you’re not doing it right’ is a common adage. Investing applies too. Although you should monitor your assets, automating them is best. This guarantees investment returns without active management. Automate your investments by
- Opening a SIP
- Investing in passive or index funds
- Using your bank’s Electronic Clearance System (ECS) to transfer funds
Have a Sound Investment Strategy
An investment strategy helps you eliminate subpar portfolios and increase your likelihood of success. Ask yourself a few fundamental queries, such as how much you wish to invest, how much profit you require, how much risk you’re willing to take, how long your investment horizon will be, and why it’s necessary for you to invest.
Make a better investment decision with distinct objectives. Seek out favorable investment opportunities and only make one investment. Building a portfolio is comparable to constructing a home brick by brick and dollar by dollar.