Investment strategy

In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. Individuals have different profit objectives, and their individual skills make different tactics and strategies appropriate.[1] Some choices involve a tradeoff between risk and return. Most investors fall somewhere in between, accepting some risk for the expectation of higher returns.

Strategies

No strategy: Investors who don't have a strategy have been called Sheep.[2] Arbitrary choices modeled on throwing darts at a page (referencing earlier decades when stock prices were listed daily in the newspapers) have been called Blind Folded Monkeys Throwing Darts. This famous test had debatable outcomes.[3]

Active vs Passive: Passive strategies like buy and hold and passive indexing are often used to minimize transaction costs. Investors don't believe it is possible to time the market. Active strategies such as momentum trading are an attempt to outperform benchmark indexes. Investors believe they have the better than average skills.

Momentum Trading: One strategy is to select investments based on their recent past performance. There is evidence both for and against [4][5][6] this strategy.

Buy and Hold: This strategy involves buying company shares or funds and hold them for a long period. It is a long term investment strategy, based on the concept that in the long run equity markets give a good rate of return despite periods of volatility or decline. This viewpoint also holds that market timing, that one can enter the market on the lows and sell on the highs, does not work or does not work for small investors, so it is better to simply buy and hold.

Indexing: Indexing is where an investor buys a small proportion of all the shares in a market index such as the S&P 500, or more likely, an index mutual fund or an exchange-traded fund (ETF). This can be either a passive strategy if held for long periods, or an active strategy if the index is used to enter and exit the market quickly.

Value vs Growth: Value investing strategy looks at the intrinsic value of a company and value investors seek stocks of companies that they believed are undervalued. Growth investment strategy looks at the growth potential of a company and when a company that has expected earning growth that is higher than companies in the same industry or the market as a whole, it will attract the growth investors who are seeking to maximize their capital gain.

Dollar cost averaging:[7] The dollar cost averaging strategy is aimed at reducing the risk of incurring substantial losses resulted when the entire principal sum is invested just before the market falls.

Contrarian investment:[8] A contrarian investment strategy consists of selecting good companies in time of down market and buying a lot of shares of that company in order to make a long-term profit. In time of economic decline, there are many opportunities to buy good shares at reasonable prices. But, what makes a company to be considered good for shareholders? A good company is one that focuses on the long term value, the quality of what it offers or the share price. This company must have a durable competitive advantage, which means that it has a market position or branding which either prevents easy access by competitors or controls a scarce raw material source. Some examples of companies that response to these criteria are in the field of insurance, soft drinks, shoes, chocolates, home building, furniture and many more. We can see that there is nothing “fancy” or special about these fields of investment: they are commonly used by each and every one of us. Many variables must be taken into consideration when making the final decision for the choice of the company. Some of them are:

Smaller companies: Historically medium sized companies have outperformed large cap companies on the Stock market. Smaller companies again have had even higher returns. The very best returns by market cap size historically are from micro-cap companies. Investors using this strategy buy companies based on their small market cap size on the stock exchange. One of the greatest investors Warren Buffet made money in small companies early in his career combining it with value investing. He bought small companies with low P/E ratios and high assets to market cap.

See also

References

  1. ↑ "Big Picture Strategies".
  2. ↑ Sheep Definition | Investopedia
  3. ↑ "Wall Street Journal Dartboard Contest".
  4. ↑ "Practical rules for investing".
  5. ↑ Performance Chasing: A Losing Strategy - TheStreet TheStreet.com
  6. ↑ "Why You Shouldn't Buy a Highly-Rated Mutual Fund".
  7. ↑ "Dollar Cost Averaging". Bogleheads. Retrieved November 19, 2015.
  8. ↑ http://www.investopedia.com/articles/stocks/09/buffett-bear-market-strategies.asp

External links

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