A well-planned investment strategy is essential before taking any investment decisions. Business investment strategies are generally based on a long run period. The formation of business investment strategy largely depends upon the factors such as long-term goals and risk on the investment.
The return on investment is not always clear, so the investors prepare an investment strategy so as to face the ongoing challenges in investment. A balanced investment strategy is generally required in the process of investment, which possesses long time period and some risk tolerance. In the case, when an investment strategy is aggressive, the chance of attaining a bigger goal is higher. An efficient investment strategy can be obtained from the portfolio theory, which shows good estimates on risks and returns.
Investment Strategy is usually considered to be a part, more of a branch of finance than economics. Investment strategy is defined as set of rules, a definite behaviour or a procedure guiding an investor to choose his investment portfolio. For e.g. investing in mutual funds has recently emerged as a very favourable investment strategy.
An investment strategy is centred on a risk-return trade off for a potential investor. High return investment instruments such as real estate and mutual funds usually have more risks associated with it than low return-low risk investment opportunities. The return on investment can be calculated on past or current investments or on the estimated return on future investments.
Types Of Investment Strategies
A passive investment strategy is attempted to minimize transaction costs while an active investment strategy is used to maximize returns based on moves such as proper market timing. This generally means, buying investment instruments when they are cheap and selling them off when their prices apprize. This investment strategy, however, is not very beneficial for small time investors. Small time investors can adopt the buy and hold investment strategy to invest in equities, which although volatile in nature, give favourable long run returns. Investing in equity markets for small time investors is associated with the investors holding on for very long periods. In the case of real estate, the holding period extends the lifespan of the mortgage. Notably, in case of this investment strategy, indexing or buying a small proportion of all the shares in market index or mutual funds is a purely passive variant of the above investment strategy.
The strategy of value investing, a classic investment strategy propagated by Benjamin Graham concentrates on the strategy that an investor buys shares of a company as if he was buying off the whole company without paying any attention to the stock market scenario or any exterior conditions such as the political climate. By the end of the day, if he can buy the stock at less than that its actual future worth to the buyer, the person is said to have discovered a “value investment.”
An investment strategy in mutual funds is probably the best bet for a profitable investment. Mutual funds are defined as a pool of money supplied by different investors and in turn used by the mutual fund company to invest in various assets such as stocks and bonds. However, a detailed research has to be conducted for choosing the mutual fund companies and only those should be considered which have a professional investment manger. This ensures that the funds get channelled towards the right investments. This also applies for investing in stock markets where a decision to invest should follow a through research about the past and current trends of the stock prices and their Net Asset Values. Analyses from market researchers about the predicted future trends should also be considered otherwise gains from capital appreciation; capital gain distribution and dividends might not be realized.
Which investment strategy should you choose?
There is no one investment strategy that suits everyone. A good investment strategy is the one that works for you by playing to your strengths and eliminating your weaknesses. For e.g. if you’re good with numbers then an investment strategy that focuses on detailed analysis of company accounts may suit you. A good investment strategy should also be simple to follow, easy to summarise and tell you when to buy and when to sell; of course it should be based on sound investment logic.
Value investing is one investment strategy that has worked well over time. In simple language, you buy shares when they are cheap and then you sell the shares once they become more expensive. Of course you can also employ a small combination of investment strategies.
Other popular investment strategies include focussing on a particular sector of the market that you know well. The idea here is that by researching an area in depth you’ll gain an edge over other investors in the market. Very closely related to this investment strategy is the idea of top down investing. Here, you identify a sector which you think will benefit from a major trend and then pick the best companies within that sector.
One approach which some people don’t favour is the charting or technical analysis. This is the practice of using price charts and other technical data like the volume of shares traded, to predict what will happen in the future. You end up buying and selling too frequently, hence racking up expenses that eat into your returns.
Finding an investment strategy that works best for you is likely to involve some trials and errors. You’ll probably have to experiment with a few different ones before you settle on the one you prefer. The world of investment has its styles, so sometimes some investment strategies work better than the others. Indeed, when the stock market is rising, most investment strategies will do well. This is why it’s a good idea to benchmark your performance against the overall market. This way you can see if all your effort was worthwhile and help you make sure you don’t attribute your investment success to merely luck.
Investment strategies leading to green investments or investments in renewable sources of energy will be the next big thing in the investment spectrum in the future.