Investment planning is one of the most essential aspects for every single individual to gain financial stability. Therefore, it is quite important to have adequate planning to fulfill the requirement and achieve the targeted goal. The investment strategies should be quite helpful in the direction to achieve the financial goals. Investment strategies help the investors to select where and how to invest. The assumption of investment strategies is entirely dependent upon factors like risk capacity, expected returns, long-term goals, short-term goals, required corpus amount, retirement age, etc.
The best quality of investing strategies is that it is entirely flexible. If one finds that the selected one does not suit the requirement of the risk tolerance or schedule then for sure he/she can execute the changes. But, one should even be aware of the fact that it is going to be expensive because every purchase carries a fee. Most importantly, selling assets introduces realized capital gain that is not only taxable but even expensive.
Here, discussion is going to be made on four common investing strategies that easily suit the need of investors. Howsoever, time is needed to understand the character of each strategy to get to a better position for the selection of the right long-term investment without incurring the expense of changing course. Make sure that one can afford to invest before putting in the money into it. Next is to set the goal so that one gets determined for the task that needs to be performed.
After this, figure out the risk tolerance which is determined by several factors such as age, income, time remaining for retirement. In simple terms, the younger one is, he/she can take more risk. More risk means higher return whereas lower risk means gains that cannot be realized quickly. Finally, learning the basics is a great idea before one needs to invest. Let’s discuss the five different types of investment strategies.
This is the strategy that involves the purchase of securities that pay dividends. Income investors assume that they can find from this strategy a steady return on a steady schedule. For example purchase of dividend-paying stocks, mutual funds, or bonds to alleviate the procedure of steady income. But the most essential one is the securities that pay returns because it is the thing that most people believe about investing. By the time one arrives at their retirement phase, they typically start loading up on the bond side which is a kind of securities to get guaranteed income off the bonds and even less term of stocks that is not paying dividends.
- Returns are decent keeping the risk quite on the lower side.
- If one has huge capital, to begin with then he/she does not need to take the risk of betting on the success of the business instead can leave off the interest earned from the dividend.
- This is investing strategy that requires a larger sum of money from upfront to see a return that is sure to excite one. But the investor starting with less capital cannot enjoy the major benefits from the investment.
- Income investors tend to be more focused on dividends in comparison to the value of the underlying company or assets one is investing upon.
- It can take a longer time to see the meaningful result while practicing income investing which is found to be not an ideal choice for those who create financial freedom and retires quickly. It is all about the 1 or 2% return over a longer period.
- If one migrates to higher dividends and a higher rate of returns, then one is sure to get through serious risks that can backfire in the long run. If it is an income then for sure no one would like to involve a lot of risks.
- So it is needed to be careful while investing money in the income investing strategies and even will to accept a lower rate of return.
This is one of the most interesting strategies when investors are interested in the purchase of companies having a positive social or environmental impact. This is a strategy that is quite similar to charity. In other words, it can be assumed that people are more interested in the positive benefits of anything that is owned in the society or environment than the actual financial return. Another important factor is value investing that induces great impact. If one likes to invest in a company that is termed a polluter, then the value can be misaligned with the investment choice.
- Impact investor invests in companies which reflect values that opt to be a great thing if social change is considered as a priority for the investment journey.
- Serve as the supportive measure for companies for improvement of the company
- Impact investment is considered to be more about change in the aligns of value rather than the growth of the revenue. This is the investment for the people who have lots of money and have the potential to take risk of loss rather than investment in the company that appears to be valuable.
- Impact investing companies are found to be a bit overpriced as well as lack solid profit-making elements that most of us are keen to purchase from the companies.
This is the strategy that is centered all-around investment in the companies having higher growth rates. There are companies such as Facebook, Google, and Apple with higher PE (price to earnings) ratios and even has vast potential for future growth. There is an expression of Peter Lynch that has been popular in the late ’90s, “invest in what you know” is considered to be admired by many people and they look for the companies that are known to be valuable to exploit the future growth. This is not the market that everyone would like to enter into because growth investing can be very bad for an investment portfolio if one enters the company based on current valuation. It is considered to be okay but the returns are great.
- It is considered as a long term growth investing strategy which provides higher returns
- Capitals are assumed to continuously move into stock with a better perspective of growth. But according to reality, success in growth investing entirely depends upon getting the timing right.
- The market is continuously changing its way since the ’90s and still, growth companies find it harder to come by.
- Prediction of high-growth industries is easier in comparison to the prediction of companies that are going to come on top.
This is the strategy that is quite similar to growth stocks, small-cap stocks that focus more on the potential of the company to showcase the major growth. Investors howsoever search for the young and more risky companies with the prime focus to attain the size of the companies like Google or Facebook so that investors can gain investments with the massive return.
- It has been recorded that small-cap stock that is tracked by the Russell index shows much faster growth than overall big-cap stock. But with the end of the day, it gets lowered to stock selection.
- Selection of correct stock should involve higher risk as there is no storage of small companies that goes out of business or fail to show major growth.
- Stock prices display much fluctuation while big investors sell or buy stocks. Howsoever, volatility is not inclined toward the company itself but conveys more about the action of a few larger investors which is useful to disclose the huge losses monitored in the capital.
Value investing is all about buying companies that are on sale, priced far below the true value. Such types of investing strategies work on the principles obtained from other types and relate to coming on top. When done right, one gets the option of companies’ growth as well as small-cap and income investment stocks from stocks that comes with the discount accounting to value and interest. This is the real way to go through. Value investor purchases the companies that are known in the market to produce cash flow in the long run whomsoever they are on sale at a discounted price. It has been recorded that famous personalities like Warren Buffett, Ben Graham, Mohnish Pabrai, and Charlie Munger like to invest in value investing strategy because of its ability to generate a higher return with minimal risk.
- With value investing one becomes able to get a higher return at the lowest amount of risk.
- One can buy companies when it’s on sale to produce effective buying stock while economical contraction or when some kind of event result in economical fear and such situation they tend to go up back where it was present previously.
- Value investing is not for everyone because people who desire to gain benefit quickly have to face challenges. Patience is a need in trading with value investing.
- This type of investing needs proper knowledge and know-how concept to become successful because this could result in loss of money.
The decision to select a strategy is more important in comparison to the strategy itself. This is because all these strategies can generate significant returns as a long investor makes a choice and commitment. This is the major reason one select it to get started with the great effect of compounding. For annual return, a strategy needs to be selected to suit the schedule and risk tolerance by ignoring higher abandon rate with the frequently changed strategies.