Now that you have started thinking about your future – retirement maybe, or you are just looking for ways to increase your wealth through investments, and you have made the decision to invest, it is important that you get things right from the very beginning of your investment journey. By knowing how to create an investment strategy, you give yourself a good foundation to build upon going forward.
What is an Investment Strategy?
An investment strategy helps you (the investor) to decide where to invest and how to invest as regards your choice of industry, risk appetite, expected returns, short-term and long-term holdings, corpus amount, and retirement age. Strategies can be planned in alignment with the goals that you have set out to achieve.
How to Create an Investment Strategy: Types of Investment Strategies.
In order to create an efficient investment strategy, you need to know the types of investment strategies that you can adopt. Here, we’ll talk about seven types of investment strategies for you to consider for how to create an investment strategy.
- Active and Passive Strategies
Those that make use of active investment strategies are involved in buying and selling regularly and they do this because they believe that they can outperform the market and in the process get more returns than an average investor would. Instead of buying and selling regularly, those that make use of passive strategies buy and hold stocks. It does not involve the regular buying and selling and it helps them to avoid higher transactions costs. Here, it is believed that due to the volatility of the market, it cannot be outperformed. Passive strategies are less risky than active strategies.
- Long-Term and Short-Term Growth Investing.
Short-term and long-term investments refer to the holding period that investors decide upon dependent on the value they would like to create and this holding period depends on your preference. Your preference could rely on your retirement plans, your kid’s school fees, or how soon you want to buy a new car. So, if you think that the intrinsic value of a stock will go up and a company will grow in years to come (long-term investing), then you can invest in it. That’s what growth investing is about.
However, if you believe that the value of a company will go up in about a year or two, then you will go for short-term holding.
- Dividend Growth Investing
Here, what you do is to search for companies that previously paid a dividend every year, consistently, and seeks to increase their dividend payout yearly, because these companies tend to be less volatile and more stable than others. If a company has a good record of paying dividends regularly, then you should consider it. With dividend growth investing, investors typically reinvest the dividends and allow it to accrue over the years (long-term).
- Value Investing
With value investing, you invest in companies that are undervalued by considering their intrinsic value. Even though finding these kind of companies is not exactly a walk in the park, when you do get one, you will have high returns on it. The idea there is that when the market goes for correction and the undervalued company is valued properly, the price will go up and investors that sell will in turn get high returns when they sell.
- Contrarian Investing
With contrarian investing, you can buy stocks of companies at a low price when the market is down and sell when it is high. So, you buy when it’s low and sell when it’s high. This period of market downtime could happen at a time of war, recession and other problems. At times like these, it is important that you don’t buy just any stock, instead, search for companies with the capacity to increase in value.
- Income Investing
The income investing strategy concentrates on producing cash income from stocks instead of investing in stocks that only increase the value of your portfolio. This strategy consists of two kinds of cash income that you as an investor can earn. They are: dividend and fixed interest income from bonds. This strategy provides a steady income from investments so you could make use of income investing if a steady income interests you.
With indexing as your investment strategy, you are able to invest a small amount of stocks in a market index like exchange traded funds, mutual funds, and S&P 500.
When considering any of these investment strategies to make use of, it is necessary that you have an overall objective for your investment portfolio. An objective makes picking a strategy much easier because you have to pick one (or more) that aligns with your overall investment goal.
I believe that with an understanding of the kinds of investment strategies that there are, you will now be able to make more informed decisions on how to create an investment strategy.