Investment Strategies

Reviewed byDheeraj Vaidya, CFA, FRM

What are Investment Strategies?

Investment strategies are strategies that help investors choose where and how to invest as per their expected return, risk appetite, corpus amount, long-term, short-term holdings, retirement age, choice of industry, etc. Investors can strategies their investment plans as per the objectives and goals they want to achieve.

Key Takeaways

  • Investing strategies aid investors in deciding where and how to invest based on factors like projected return, risk tolerance, corpus size, long-term versus short-term holdings, retirement age, industry preference, etc. 
  • Investors can tailor their investing plans to the aims and objectives they hope to accomplish.
  • Therefore, to reduce transaction costs, the passive method entails purchasing and keeping stocks rather than trading them regularly. 
  • Passive techniques tend to be less risky because they are believed to be incapable of outperforming the market due to their volatility.

Top 7 Types of Investment Strategies

Let’s discuss different types of investment strategies, one by one.

Investment-Strategies

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#1 – Passive and Active Strategies

The passive strategy involves buying and holdingStrategy Involves Buying And HoldingThe term "buy and hold" refers to an investor's investment strategy in which they hold securities for a long period of time, ignoring the ups and downs in market price during a short period of time.read more stocks and not frequently dealing in them to avoid higher transaction costs. They believe they cannot outperform the market due to its volatility; hence passive strategies tend to be less risky. On the other hand, active strategies involve frequent buying and selling. They believe they can outperform the market and can gain more returns than an average investor would.

#2 – Growth Investing (Short-Term and Long-Term Investments)

Investors chose the holding period based on the value they want to create in their portfolio. If investors believe that a company will grow in the coming years and the intrinsic value of a stock will go up, they will invest in such companies to build their corpus value. This is also known as growth investingGrowth InvestingGrowth Investing refers to capital allocation in potentially high earning companies such as small caps and startups, which grow much faster than the overall industry or mature companies. Because the returns on such investments are high, the risk that such investors face is also higher.read more. On the other hand, if investors believe that a company will deliver good value in a year or two, they will go for short term holding. The holding period also depends upon the preference of investors. For example, how soon they want money to buy a house, school education for kids, retirement plans, etc.

#3 – Value Investing

Value investing strategy involves investing in the company by looking at its intrinsic value because such companies are undervalued by the stock market. The idea behind investing in such companies is that when the market goes for correctionMarket Goes For CorrectionMarket Correction is usually referred to as a fall of 10% or more from its latest high. It happens due to various reasons such as declining macro-economic factors, intense pessimism across the economy, securities specific factors, over-inflation in the markets, and so on.read more, it will correct the value for such undervalued companies, and the price will then shoot up, leaving investors with high returns when they sell. This strategy is used by the very famous Warren Buffet.

#4 – Income Investing

This type of strategy focuses on generating cash income from stocks rather than investing in stocks that only increase the value of your portfolio. There are two types of cash income which an investor can earn – (1) DividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more and (2) Fixed interest income from bonds. Investors who are looking for steady income from investments opt for such a strategy.

#5 – Dividend Growth Investing

In this type of investment strategy, the investor looks out for companies that consistently paid a dividend every year. Companies that have a track record of paying dividends consistently are stable and less volatile compared to other companies and aim to increase their dividend payout every year. The investors reinvest such dividends and benefit from compoundingCompoundingCompounding is a method of investing in which the income generated by an investment is reinvested, and the new principal amount is increased by the amount of income reinvested. Depending on the time period of deposit, interest is added to the principal amount.read more over the long term.

#6 – Contrarian Investing

This type of strategy allows investors to buy stocks of companies at the time of the down market. This strategy focuses on buying at low and selling at high. The downtime in the stock marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price.read more is usually at the time of recession, wartime, calamity, etc. However, investors shouldn’t just buy stocks of any company during downtime. They should look out for companies that have the capacity to build up value and have a branding that prevents access to their competition.

#7 – Indexing

This type of investment strategy allows investors to invest a small portion of stocks in a market index. These can be S&P 500, mutual fundsMutual FundsA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etcread more, exchange-traded funds.

Investing Tips

Here are a few investing tips for beginners, which should be kept in mind before investing.

Advantages of Investment Strategies

Some of the advantages of investment strategies are as follows:

Limitations of Investment Strategies

Some of the limitations of investment strategies are as follows:

  • Average investors find it difficult to outperform the market. To earn an average return from investments, it may take them years, whereas professional investors would earn the same return in weeks or months.
  • Even though a lot of research, analysis, and historical data are considered before investing, most of the decisions are taken on a predictive basis. Sometimes, the results and returns may not be as it was anticipated, and it may delay the investors from achieving their goals.

Frequently Asked Questions (FAQs)

What are quantitative investment strategies?

Quantitative investment strategies, also known as quant strategies, are investment approaches that rely on quantitative analysis and mathematical models to make investment decisions. They involve vital elements, data analysis, quantitative models, risk management, and automated execution.

What are bond investment strategies?

Bond investment strategies refer to approaches investors use to build and manage a portfolio of bonds. These investment strategies aim to achieve specific objectives, such as generating income, managing risk, or capital appreciation. Hence, the common bond investment strategies are buy-and-hold plans, yield curve strategies, duration management, credit quality strategies, and sector rotation.

What role does risk management play in investment strategies?

Risk management is crucial in investment strategies. It involves assessing and mitigating various types of risks, including market, credit, and concentration risks. Diversification, asset allocation, and setting appropriate stop-loss limits are risk management techniques used to protect investments.

Conclusion

It is very important to have an investment strategy. It will help you rule out poor portfolios and will increase the chances of success. Ask yourself a few basic questions like how much I want to invest? How much return do I need? How much is my risk toleranceRisk ToleranceRisk tolerance is the investors' potential and willingness to bear the uncertainties associated with their investment portfolios. It is influenced by multiple individual constraints like the investor's age, income, investment objective, responsibilities and financial condition.read more? What will be my investment horizon? Why did I need to invest? Etc. The clearer you are with your objectives, the better decision you will make regarding your investment. Always lookout for good opportunities and never invest at one go. Building a portfolio is like building a house brick by brick, money by money.

This has been a guide to what are investment strategies and its definition. Here we discuss different types of investment strategies along with advantages and disadvantages. You can learn more from the following investment and asset management articles –

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