Boost your investment skills with our top 10 investment strategies. These strategies are designed to help you achieve your money goals and make more money from your investments. Whether you’re new to investing or have some experience, you’ll find valuable tips, from smart buying to investing in growing companies.
The Context
A vision without a strategy remains an illusion — Lee Bolman
A strategy is an action plan for achieving short-, medium-, and long-term objectives.
Strategies are necessary for businesses and organizations to compete and exist, but investors also need them to map out their investing process and establish the parameters. Investment strategies have evolved over the decades through research papers and the wisdom passed on by great investors and notable experts.
These are the people who have dedicated their careers to studying and experimenting with markets. The majority of DIY investors have a haphazard approach to investing, thus investing itself occasionally feels like a difficult ordeal.
However, if applied carefully, some strategic techniques can provide larger and more reliable returns on investments. Here is a list of the top 10 carefully chosen investment methods to assist you in becoming more knowledgeable about investing.
1. Active Investing
Active investing is a nervous form of investing that heavily relies on the amount of time that you can devote to your money-making endeavors. It’s a hands-on approach that requires extensive analysis and continual tracking of market attitudes. The strategy deployed in active investing is relatively simple yet demands intensified mental activity. In this investment strategy, you simply base your sale and purchase decisions on short-term movements.
These movements are generally influenced by factors such as quarterly results, corporate decisions, changing government policies, international events, news developments, and the current state of the overall economy. The key motive for investors who are involved in active investing is to mainly outperform the Index. A market index tracks the performance of a certain group of stocks, bonds, or other investments. Example- NIFTY 50, SENSEX, or S&P 500 in the US.
Active investing is a good choice for investors who are in their prime. These are the investors who prefer to constantly stay on top of their financial game. The good part about an actively managed portfolio is the choice to exit from stocks that are expected to decrease in value due to anticipated reasons. Active investing works best for informed, full-time investors and professional fund managers.
This strategy only works well for those retail investors who can multitask and can afford to spend an ample amount of time in investing efforts along with their day jobs. On the downside, since active investing demands a lot of time, dedication, and consistency it’s practically impossible to pursue for extended time frames.
When it comes to the transaction fees resulting from the constant buying and selling of stocks and assets, active investing can be expensive on the wallet.
2. Passive Investing
Retail investors who are employed and already making a respectable living from their other abilities, skills, and talents are most suited for passive investment. Passive investing is usually achieved through pre-packaged financial products that are offered in the secondary market.
These products would include Mutual Funds, Diversified Funds, ETFs, Private PMS funds, and other composite schemes. This type of investing involves limited buying and selling. The action of not selling too frequently makes passive investing cost and time-effective in the longer run. Although it’s less expensive than active investing, passive investing often eats away a fair bit of your returns because of the underlying fees and commissions.
The few mentioned here are also referred to as loads or an expense ratio, this money is charged in exchange for providing easy access and the across-the-board management of passive products. Lack of stock selection freedom and occasionally failure to outperform benchmark market returns (Index) are the drawbacks of passive investing.
3. Value Investing
Value investing is a sort of investing that is appropriate for those with superior fundamental and value analysis understanding (intrinsic Values). If you choose to use this approach, you will need to be very patient, work very hard, and possess a different perspective.
The purchase decisions in this strategy are based on the intrinsic value of the security. The intrinsic value measures the value of an investment based on its cash flows. The stock prices that you see on the stock ticker are heavily influenced by supply and demand.
Where market value tells you the price other investors are willing to pay for an asset, intrinsic value calculates an asset’s underlying price based on an analysis of its actual financial performance. The discount of the market price to the intrinsic value is referred to as the “margin of safety“. For the records, Benjamin Graham is referred to as the father of Value Investing who established the framework for identifying the margin of safety in cheap corporations.
Mr. Warren Buffett further expanded Graham’s concept with a focus on finding an extraordinary company at a reasonable price rather than generic companies at a discount price. Value Investing strategy offers capital safety in the long run as the knowledge of good bargains usually protects investors from becoming a victim of market mispricing. Since it can be difficult to determine an asset’s true intrinsic value, many investors choose to combine different methodologies to make the best decisions.
The most popular methods to identify intrinsic value are—
☑ Discounted Cashflow Analysis (DCF)
☑ Dividend Discount Models (DDM)
☑ Growth Valuation Model (GVM), and
☑ Comparative Valuation Model (CVM).
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4. Deep Value Investing
If value investing is buying a dollar worth of stock in 60 cents; Deep Value Investing is about buying the same stock in 40.
Exceptionally extreme patience and a stable mindset are prerequisites for this kind of investing. Deep Value Investing, which uses a more severe form of value investing, is only appropriate for finance nerds. This stands out by locating and holding the stocks of businesses with incredibly low valuations.
Often these companies are particularly out of favor or in industries that are out of favor. Some investors in this category are known to benefit from changes such as new management, a merger, or the spin-off of a subsidiary. Deep value investing uses statistical analysis to look at several interrelated elements that have an impact on a stock’s current market price. Deep value investors frequently act with strong conviction and little emotion.
5. Income Investing
Income investing is a strategy where your investments work for you by generating a regular paycheck. This strategy works best for risk-averse and retired professionals who don’t want to be constantly bothered by factors like changes in interest rates, market volatility, and geopolitical circus.
Income investments do not necessarily include just Stocks but rather a healthy mix of assets like dividend-paying stocks, debt instruments like bonds, and other instruments that are capable of generating interest payments.
This is often achieved by making your investments work for you, thereby generating a regular paycheck. This strategy approach primarily emphasizes the concept of passive income.
The regular cash flow that you receive is a reward for holding a blend of high and low-risk assets referred to as “Passive Income”. Different financial instruments and mechanisms that are deployed to generate income are referred to as streams.
The vital aspect for you to note here is that a portfolio management strategy is only considered income investing when it generates its return through payments made by the assets rather than by selling those assets for a profit.
This strategy is based on the passive investing principle of acquiring assets and holding them for an extended period. On a positive note, Income investing offers low risk, multiple income streams, reduced volatility, and income generation even in bear markets.
The drawdown of income investing is low potential total returns, increased sensitivity to interest rates, and sometimes diminished purchasing power owing to the effects of inflation.
6. Growth Investing
Growth investing is a type of investment strategy that only focuses on companies with promising future prospects. A growth investor identifies companies that have an “above-average” growth rate. These companies possess long-term dominance and show lasting and robust growth in revenues, balance sheets, cash flows, and profits. Growth stocks are generally found in small, mid, and large-cap sectors. These companies have the potential to outpace their opponents with innovative products, services, and price offerings.
Growth stocks have a good earnings record and are expected to continue growing shortly as well. This continuous growth rate is a critical characteristic of a growth investing strategy.
Besides, these stocks are more “expensive” than their counterparts as growth stocks generally have high price-to-earnings (P/E) ratios and high price-to-book ratios. Investors who prefer to invest in growth stocks are always ready to pay a premium for these stocks relative to current earnings on the assumption that future earnings will justify the price.
Growth investing helps draw an advantage over other types of investing as it comes with a high chance of significantly higher returns. On the downside, growth investing demands comprehensive research.
Additionally, since company profits are typically reinvested in the company to support long-term growth, you might not be able to produce any dividend income.
7. Indexing
Indexing is a type of passive investing strategy that replicates the market movement. This is probably the best investment strategy for many competent investors. A market index measures the performance of a “basket” of securities (like stocks or bonds), which is meant to represent a sector of a stock market.
For example, The NIFTY 50 is an index of the country’s top 50 companies by market capitalization that are listed on the National Stock Exchange (NSE). The Standard and Poor’s 500, or simply the S&P 500 is another stock market index tracking the performance of 500 large companies listed on stock exchanges in the United States.
Indexing is done through a variety of basket products available in the market such as an Index Fund like UTI NIFTY Index Fund or Index ETFs like Nippon India ETF NIFTY BeES. This strategy is designed to match a market, not beat it. If done properly, it can be cheap, profitable, and tax-efficient in the long run. On the downside, indexing provides very little downside protection during bear markets.
When the markets tank, they pull the Index down with them as well. The lack of flexibility often becomes a constraint.
8. Dollar Cost Averaging
The two main predispositions of a common investor are fear and greed. Dollar-cost averaging helps beat both biases at once. Dollar-cost averaging (DCA) is an investment strategy that aims to apply value investing principles to regular investment.
This term was first coined by Benjamin Graham in his book The Intelligent Investor. As a simplified version of Graham’s definition; In DCA, you simply invest the same amount each month or quarter.
When the markets are low you get to buy more shares and when the market is high you obtain less. You simply end up with a satisfactory overall price for all your holdings.
Dollar-cost averaging helps average out the purchase costs over a long period.
The systematic investment plan (SIP) that is used to invest capital in mutual funds often mimics the DCA strategy. This strategy demands dedication and commitment. To be successful, you must stick to this approach during both good and bad times.
On the downside, DCA does not always guarantee good returns, especially during extended periods of declining markets. The constant buying keeps adding to the paper losses often noticed in the form of negative or unsatisfactory returns.
9. Momentum Investing
This type of investing is suitable for risk-takers as it involves a good deal of uncertainty. The traditional method of picking individual stocks after comprehensive research does not apply to momentum investing.
Momentum investing is primarily achieved through price action that is accessible through technical charts. The basic concept of momentum investing is that short-term performance is repeated with winners continuing to be winners and losers continuing to be losers in the short run.
Momentum investing is a system of buying stocks or other securities that have had high returns over the past three to twelve months and selling those that have had poor returns over the same period. While it’s impossible to say that the stocks that have gone up will continue to keep going up, this strategy helps in manipulating the overall market sentiment.
On the downside, this strategy can sometimes miserably backfire. Many unknown factors influence certain trends and a common investor can’t easily identify the same. It could be the seasonality effect, heavy inside buying, and selling, news, or business decisions that are yet to be made public. An additional drawback of momentum investing is the brokerage costs that are incurred because of the constant buying and selling of assets.
10. Coffee Can Investing
Coffee Can Investing is a low-risk strategy and works best if you have a long-term view and your asset or stock selection is limited and prudent. Coffee Can Investing was first termed by Robert G. Kirby way back in 1984.
The idea traces back to Old West America before the banking system was established when people used to put all their valuable possessions in a Coffee Can and hide them under the mattress. As a result, people would not touch them for ages, and sometimes even used to forget about them.
It is hence a “buy and forget” style of investing in shares of companies that have performed well consistently. This strategy is highly cost-effective as it involves low fees, commissions, and zero management costs.
The drawdown however is the massive dependability on the quality of your research and the requirement of substantial upfront capital to commit for the long haul- usually ten or more years.
Conclusion
It is nearly hard to adhere to a single strategy consistently because an investor’s lifecycle typically undergoes numerous changes and improvements as they gain experience in the markets. We enjoy thinking of investment methods as building pieces. You can experiment with them based on your needs.
Many investors prefer to mix and match standard strategies to tailor models to their ever-evolving situations. For instance, you can “Cofee Can” a sudden influx of fortune (gifts, bonuses, inheritance, etc.) and alternatively continue with “Growth Investing’ or “Indexing” with your monthly investment allowance.
You may also pursue “Indexing’ using ‘Dollar-Cost Averaging” to build an additional safety net for your investment outflows. There are countless variations of investing strategies. If you are an investor with a clear vision with a bit of creativity then the sky is your limit.
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1 Comment
I enjoy reading these episodes. In my opinion, the composite technique is best for larger portfolios. Smaller portfolios can do well with just 1-2 strategies.