There are numerous investment strategies to use in your investing. They all have good periods and bad periods and are suited to different types of personalities. They also require differing levels of knowledge, experience and time. The key is to find a method that makes sense to you and suits your personality, and then get good at using that method. These are some of the most common investment strategies:
Buy and Hold Investing
The most basic strategy is to simply buy shares and hold them forever. In many cases, the research will show that this is a bad strategy. Many companies fail in time and taking some sort of action is logical if a company you’ve invested in has little chance of success. The advantage of this strategy is that the costs are very low, and you won’t be getting in your own way, by second guessing the market. Very often investors are their own worst enemy.
Value investors buy companies that are trading below their intrinsic value. A very simplistic way to think about intrinsic value is the value of the underlying assets owned by a company. In other words, if the company was wound up and all the asset were sold, the amount that would be raised would be the intrinsic value. Buy buying companies trading at below their intrinsic value, investors are looking for a margin of safety. Value investing requires time, patience and an understanding of company accounts and valuation.
Growth investors invest in companies that are growing their revenue and earnings rapidly. These shares often trade at very high price multiples, but if the company can grow its earnings rapidly, the price will be justified. Investing in growth companies requires knowledge and interest in new industries, consumption trends, and technology.
Growth at a reasonable price (or GARP) investors know that great growth shares are never going to be cheap, but they also don’t want to overpay for shares. They try to buy the companies that have the best potential growth for the price they are paying. GARP investors need to understand growth investing and valuation methods.
Momentum investors buy the shares with the highest price momentum. Usually, the shares that rise the most during one period will continue to do well in the next period. While this approach might seem very simplistic it actually does surprisingly well. It’s also very easy to implement and manage, so it’s a great approach for those who don’t have a lot of time to spend on their investments. The downside is that a momentum portfolio will go through periods of extreme volatility.
Trend following is similar to momentum investing but is implemented on a share by share basis, with very clear rules. It’s actually more of a trading strategy than an investing strategy, but positions can be held for a long time. It’s also more commonly used for commodities, index futures, and currencies. Trend following is a very effective method to ride long trends, but also a terrible strategy during range bound periods.
Dividend investors invest in shares that pay good, sustainable dividends. The primary goal of dividend investing is to create a sustainable, growing income stream. But dividend investing can also grow capital if those dividends are reinvested and allowed to compound over time. Companies that pay dividend tend to have lower share price volatility too.
ETFs have brought the costs associated with buying, owning and selling a portfolio of shares down significantly. This has made a couple of approaches viable that would never have been viable in the past. ETF rotation strategies allow an investor to move money between regions, countries, sectors, industries, themes and investment styles without the costs eating into the returns.
One of the problems with momentum investing is that the individual shares can be very volatile, and owning enough shares to reduce volatility can be very expensive, and time-consuming. ETF rotation strategies combine momentum investing with the lower volatility of ETFs. You can read more about this approach here.
Which Investment Strategy is right for you?
Investing successfully requires investors to use a strategy that fits their personality. Some strategies, such as value investing require investors to go against the herd which can be very difficult. If you would find it difficult to buy when everyone else is selling, then value investing isn’t for you. On the other hand, growth and momentum investors can go with the crowd but will face periods with large losses. Every now and then a large correction or bear market comes along, and it’s the shares that have been rising the fastest that fall the furthest. Value investing also requires careful analysis of financial statements.
To find the strategy that fits your personality, try to imagine yourself dealing with the worst periods for that particular strategy – not the periods where everything is going well.
The right way to invest is to find one or two investment strategies that suit your personality and then learn all you can about those approaches. The wrong way to invest is to move from one approach to the other depending on what seems to be ‘hot’ at that time. Investors are rewarded for their research and hard work, but those rewards don’t come immediately. When a particular strategy performs, those invested in those types of assets are being rewarded for the work they put in months or even years before.
And remember, finding the right strategy is just the start. You need to become proficient at that type of investing, and that takes time and commitment.