Any successful venture is at all times preceded by a full-fledged strategy. Active or passive investment strategies, both of them entail determined decisions and responsibilities. Because investing is not a sure thing in most case, it is much like a game – you don’t know the outcome until the game has been played and the winner has been declared.
As an investor your plan of distributing assets among various investments, taking into consideration such factors such as individual goals, risk tolerance and time horizon.
Usually the strategy will be designed around the investor’s risk-return trade off: some investors will prefer maximize expected returns by investing in risky assets, others will prefer to minimize risk, but most will select a strategy somewhere in between.
The main question is to find the necessary investment strategy. It means that you should find the most profitable investment property or investment market with minimal risks.
One of the better-known investment strategies is buy and hold. Buy and hold 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.
There are different investment strategies which are based on their priorities and demands, such as:
- Growth investing: If you are a growth investor you will be looking for companies that traditionally have high growing earnings. In theory, high growth equals high stock prices and in turn, high profits. Companies promoting growth investing can achieve initial success but tend to be limited by capital. While the rewards can be very high in growth investing, the risks are high as well.
- Income investing: If you are an income investor, you are conservative and understand things easily. Income investors target companies that consistently pay high stock dividends. This is a preferred stock market strategy for those around retirement age. This investment strategy looks for companies that tend to be large and well-established. There is always a risk in stock market investing, but income investing is the most conservative investment strategy; in fact it is also known as defensive investing because it tends to protect you (investor).
- Value investing: If you are a value investor, you’ll try to find stocks that have been overlooked by the rest of the market. While this doesn’t necessarily mean they are low priced stocks, it does mean that whatever reason, the market has undervalued a particular stock. Many times a stock gets overlooked while investors chase profit in another company in the same stock sector. Technical analysis is important with such companies since you don’t want to confuse undervalued.
As the investors are reaching out to the equity market more often, in the markets that appears like investors can do no wrong and euphoria among the investor community is palpable. A 5-point investment strategy can be drafted for this scenario:
- Invest in tax –saving funds: Tax saving funds has emerged as strong contenders from the equity-oriented funds segment. If you can take on the risks associated with tax-saving funds, then you must consider making investments using the systematic investment plan route. This will ensure that you can spread your investments over long time horizons and avail benefits of rupee cost averaging. It has a 3 year lock period.
- Invest in large cap funds: By investing in such funds, your portfolio is exposed to a large cap variety, may be in small amounts but in line with your overall risk profile. It would provide you the opportunity to diversify your portfolios and be better insulated in case of change in trend in the markets. However, you as an investor will have lesser choices in this section.
- Restructure your Portfolio: When you have decided where to invest, you should then realign your portfolio in sync with your risk-appetite. Another thing would be to dispose off the poor quality investments you might have made earlier.
- Curb your Enthusiasm: It’s important that you should resist the temptation to make a quick buck and continue to invest in line with your risk-profile.
- Get sound Advice: A good investment advisor will help you successfully ride in surge in markets and emerge a winner; he can also assist you achieve your objectives.
While designing investment strategies, you should have the acumen to analyse the financial market. For this, you should equip yourself with the knowledge of:
- High grade bonds: Prices rise. These bonds continue to provide excellent returns
- Low grade bonds: Low grade bonds remain attractive.
- Commodities: Commodities are still weak.
- The broad stock market: The stock market is strong.
- Stock sectors: Investment in commodity driven stocks remains unattractive. Financial stocks and technology stocks outperform the broad market.
There is a simple rule to mathematics that is unavoidable: the higher the price you pay for an asset in relation to its earnings, the lower your return. The same logic you should apply while investing in stocks. Instead people get excited about stocks that rapidly increase in price; a completely irrational position for those that were hoping to build a large position in the business.
After looking at the way all the emerging industries in different countries work, and how the different financial institutions (banks, government bodies) react to the temperamental market behavior, the first lesson for you to go where the growth is.
If you are a novice investor, work closely with a financial planner before making any investments.
Keep in mind, that companies and industries will come and go in the blink of a historian’s eye. Reason more to stay nimble in your investments. Make sure that you always have an exit strategy if developments take unexpected turns.
Never invest money without having a goal or strategy for reaching that goal! Nobody hands their money over to anyone without knowing what that money is being used for and when they will get it back! If you don’t have a plan, a goal or a strategy, that is essentially what you are doing! Always start with a goal and a strategy for reaching that goal.