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The best investment strategies, advantages-disadvantages.

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Investment strategy, what is it?

An investment strategy is the principles that are taken as the basis for your investment decisions. They can be different and depend on your investment style, risk tolerance, financial goals and capital.

Each strategy has strengths and weaknesses, so they can be analyzed, compared and choose what works for you.

Investment strategies are indispensable for setting investment goals and achieving investment discipline.

A strategy will also give you the opportunity to analyze the return on your investments by measuring and comparing.

Strategies are flexible enough, but you must remember that every time you want to make a change, there may be taxable events, especially buying/selling in the short term in unprotected accounts.

What to do first?

1. Before you choose your investment strategy, you need to have minimal information about your financial situation. This includes your monthly expenses and paying off loans or debts. Based on this information, you need to determine how much you can invest both initially and on an ongoing basis. It is important to invest exactly the free funds so that they do not affect your daily financial routine.
2. Next, you need to determine your goals, as this will directly affect your choice of strategy, its risks and opportunities. For example, you want to build a house or set aside money for your children’s education, or save for retirement. Do not set unrealistic goals, remember that the best investors do not consistently have more than 20-25% per annum.
3. The next step is to determine your risk tolerance, as told by your age, how much time you have left before retirement and your income. Younger people have more time before retirement, so they can afford more risk. Your attitude to risk, i.e. emotions, i.e. psycho-type, plays an important role. Imagine that you have lost for one night about $1000, and now imagine that 10 000 dollars? How you will react, because your next actions depend on it. Try to risk the most comfortable sums for you, but remember, the greater the risk, the higher the profit can be.
4. Master the basics of investing: Learn to read stock charts, analyze a company’s financial statements and stay up-to-date on what is going on with the companies you are interested in and the stock markets in general.
5. Never rush or act spontaneously, in most cases such investments will fail.
6. Act only within the framework of a strategy you understand. If you don’t understand it, study it so you know for sure if you will work with it. The same applies to the choice of stocks, choose only those whose business models you understand.
7. Diversify your risks, the more effort you put into it, the less damage will be done by a couple of wrong decisions. Also in an overall bear market, diversifying your risks will help save your stock portfolio.

Find out below the best investment strategies.

Types of investment strategies.

Strategy 1: Value Investing

One of the most profitable investments in the long term. This is how the most famous investors, such as Warren Buffett, have made their capital.

The task of a value investor is to identify and find high-quality and cheap stocks that have not yet appreciated in the market, to buy them at a discounted price and earn on it.

Usually information on undervalued stocks of companies is provided by mutual funds, which have baskets of such stocks. 

A quick way to identify cheap or undervalued stocks is the price-to-earnings (P/E) ratio, which is determined by dividing a stock’s price by its earnings per share. As an investor, you will be interested in companies with low P/E ratios.

Value investing is a long-term investment because it takes years for a company to scale. Of course it matters what kind of macroeconomic period is taking place, the coming period of recession that analysts are predicting will not know how long.

Advantages:

• The possibility of large profits over the long term.
• Financials and fundamental analysis underpin this investment strategy
• More reliable dividends in value companies because they are not as dependent on money for growth.

Disadvantages:

• Finding value companies isn’t easy at all.
• It requires a lot of patience and time from the investor to make the investment successful.
• Time is not a guarantee of a successful investment; a company can reduce its profits or even go bankrupt over a long period of time.

Strategy 2 : Buy and hold.

This is the simplest of investment strategies: a company’s stock is bought and held indefinitely, you don’t have to sell it. Here much depends on how good the company is, because your investment will be part of your business. The investor receives income from both the price and the dividends. On average, stocks are held for several years, so this is a long-term investment. In this strategy, you can buy shares at any price as long as the business has a sustainable position.

Holding for the long term involves fewer trades, and consequently increases returns.

Because of low operating activity and passivity in action, portfolios formed on the basis of the buy and hold strategy are called “lazy” portfolios.

Advantages: 

• Easy for beginners.
• Commissions are lower: you pay only 2 times when you buy a stock and only 2 times when you sell it, unlike short-term players.
• Dividend yields will grow.If you choose a sensible business,at a distance of 20-25 years any losses will be smoothed out. 

Disadvantages:

• You have to choose a really sustainable business, which means the risk of getting into the wrong place remains. But in this case a good investor always has in stock a diversification of risks in the portfolio and rebalancing of shares.
• Long game – have patience, here you will have to invest for decades.
• Knowledge and the ability to understand reporting and multiples.
• Need psychological stability, especially for beginners. The strategy suits the patient and disciplined, if these qualities are not your strong point, you should consider another strategy.

Strategy 3 : Impulse investing.

Based on the momentum of the stock price, that is, the decision to buy or sell is based only on the price action.

For example, a simple way: invest in the 20 most profitable stocks and hold them for 12 months. After selling the stock, repeat the strategy again. 

An impulse investor must strictly follow a set of rules relying on technical indicators that show entry and exit points for securities.

Usually using the 50-day and 200-day moving averages, their crossing gives a buy signal. 50-day crossing below the 200-day – a sell signal. 

This can also be an asset analysis: tracking the 10-year bond yield curve. A 10-year Treasury bond yield above the 2-year is usually a buy signal and a 2-year yield above the 10-year is a sell signal.

The inversion in the middle segment (2 years-10 years), i.e. when the yield on 2-year bonds is greater than the yield on 10-year bonds, is a reliable predictor of recession in 75%, and the recession is about 2 years old here.

Relying only on this indicator, you can get out of the market in time and avoid losses or even make money in the fall.

Advantages:

• The risks are higher, and thus the potential profit in the short term is higher.
• Interesting for those investors who are attracted to dynamic investing, where active action is needed rather than passive holding for many years.
• The fact that momentum investing is short-term means there is no need to tie up your capital for years.

Disadvantages:

• Not suitable for beginners because sufficient knowledge is required to determine entry and exit points.
• Pulse trading is built on market volatility, without sharp price spikes and dips there will be no suitable trades.
• You can miss your opportunity very quickly when entry and exit points can suddenly cancel out.

Strategy 4 : Investing for Growth.

You invest in companies that have the greatest chance of high annual profits. These companies have dynamically growing revenues and have significant potential for future price growth. Often these are companies engaged in innovation, so it can also be interesting. A classic example of a growth company whose securities are significantly more expensive than its competitors is Tesla.

Advantages:

• You get access to the fastest-growing companies in your industries, which increases your chances of profit growth.

Disadvantages:

• Growth stocks tend to be more expensive than others
• Finding growth stocks is an incredibly difficult task, as an investor not only needs to find them and buy them, but also to hold them for as long as possible.
• Growth stocks rarely pay dividends and are not immune to sharp declines when financial problems arise.

What strategy to choose?

Choose the approach that interests you and that you begin to learn more thoroughly.

If you already have some skills, use them in your strategies. For example, if you understand financial statements, this will come in handy for value investing.

The choice of strategy will also depend on the time you are willing to spend on research and research. Value and growth investing require a lot of time, while buy-and-hold and momentum investing don’t require as much time. 

Your attitude towards risk, which is influenced by your financial situation and temperament also matters. Passive investing will be the best choice for you if the volatility of securities keeps you awake.

As you become more experienced you will be able to gradually work out your own way of investing, which will be best for you.

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