The best investing strategies are those that align with an investor’s values, long-term goals, objectives, mindset and risk tolerance. In other words, the best investment strategy is the one that works best for the investor. The major strategies are:
Fundamental Analysis
Fundamental analysis is a form of an active investing strategy that involves analyzing financial statements for the purpose of selecting quality stocks. It is primarily used for researching and analyzing individual equity stocks.
Technical Analysis
Technical analysis use charts to recognize recent price patterns and current market trends for the purpose of predicting future patterns and trends. In different words, there are particular patterns and trends that can provide the technical trader certain cues or signals, called indicators, about future market movements and when o enter or exit a equity stock position.
Value Investing
The value investor searches for stocks that are undervalued or selling at a discount…meaning stocks priced below their intrinsic values. Value investing is based on the idea that some degree of irrationality exists in the market. This irrationality may present opportunities to realize a margin of safety and to get a stock at a discounted price. Rather than spending the time to search for value stocks and analyze company financial statements, many investors buy index funds that reflect a benchmark index.
Growth Investing
Growth stocks typically perform best in the later stages of a market cycle when the economy is expanding. The growth strategy reflects what corporations, consumers, and investors are all doing simultaneously in healthy economies–gaining increasingly higher expectations of future growth. Technology companies are currently good examples of this strategy. They are typically valued high but can continue to grow beyond those valuations when the environment is right.
Momentum investing
Momentum investing is a strategy that capitalizes on current price trends with the expectation that momentum will continue to build in the same direction. Momentum investors believe winners keep winning and losers keep losing. They look to buy stocks experiencing an uptrend.
Buy and Hold
Buy and hold investors believe “time in the market” is a more important than “timing the market.” The strategy is applied by buying investment securities and holding them for long periods of time…decades.
More on Risk Tolerance
Risk is a major component of an investing strategy. Some investors have a high tolerance for risk while other investors are risk-averse. Risk tolerance is normally determined by several key factors including your age, income, and how long you have until you retire. Technically, the younger you are, the more risk you can take.
Generally, the higher the risk, the higher the potential return. Conversely, the lower the risk, the lower the potential return. But, with higher risk comes higher volatility and greater potential for larger swings in stock prices. and, one rule to always remember is that investors should only risk what they can afford to lose.
Smart Investing.
According to Vanguard, smart investing includes focusing on things you can control, such as:
- Start with asset allocation. Asset (stocks, bonds, real estate, commodities, cash, etc,) allocation could have the biggest impact on the performance and volatility of your investments.
- Protection through diversification. The more variety of bonds and stocks you own, the smaller the impact each one individually can have on your overall portfolio, which lowers your risk.
- Don’t let high fees costs eat away at returns. The amount you pay to invest has a direct impact on your returns.
- Keep performance in perspective. The length of time you have until you need the money from your investments is inversely proportional to the amount of time you should spend focusing on your performance.
- Monitor risk level & rebalance. Remember the importance of asset allocation and how it plays a critical role in keeping you on track.
- Make regular investments. If you’re trying to increase your portfolio to meet a specific goal, making small investments consistently makes a big difference.
- Prioritize financial goals. Most people have multiple demands on their money. There’s a right order in which to pursue financial goals such as eliminating debt, creating an emergency fund, and investing for retirement or college.
Investors should consider investment strategies that complement their financial plan and long term (10 years or more) investment objectives. The best strategy is the one that works best for the individual investor’s unique investment objectives and tolerance for risk.
In general, it is recommended that investors broadly diversify across asset classes, industries and geographies and remain flexible in order to navigate changing market conditions. For equities, it will be important to choose stocks with reasonable valuations that deliver some income and that have a margin of safety which can support valuations in a downturn.
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