Investing in the stock market is potentially a much more lucrative investment than, for example, a bank deposit, but it is also much riskier. In order not to lose all his money instead of the expected income, the investor must choose the right investment strategy.
What is an investment strategy
It is an investor’s sequence of actions, a carefully designed plan for allocating money to buy and sell assets for profit.
To find your strategy, you do not necessarily have to reinvent the wheel. Among the already existing ones, there are those that have worked reliably for many decades and even centuries.
What are the different types of investment strategies
Some investors believe that there are only three types of strategies that affect the result: aggressive, moderate, conservative. However, all the above-mentioned only speak about the level of risk in investing, many other important aspects are out of sight in this approach. In order to invest correctly, one should consider all investor’s actions that can affect the final result.
Any practising investor knows that there is a direct correlation between the level of risks and the level of profitability. The higher the risk of a particular investment, the greater the return an investor can potentially expect. And vice versa: the lower the risk, the lower the return.
Aggressive, moderate or conservative
Using an aggressive strategy, an investor hopes for a profit that cannot be lower than 45-50% per annum. In some rare cases, it can be several times higher than the mentioned values and reach 100%, 300% and even 1000% per annum. The classic example of such aggressive financial instrument is undervalued securities of the third echelon companies. It is clear that when financing such high-risk instruments, the probability of investment loss may approach 90-100%.
Investors using a moderate strategy expect a more reasonable level of profitability of approximately 20-45% per annum. They invest their capital in more reliable assets such as:
- Securities of highly reliable companies;
- high-yield mutual funds or ETFs.
With a moderate strategy, the risk level remains quite high and such investments are not absolutely safe.
The conservative investment strategy has the lowest yield. Depending on various circumstances, it can be 10-20% per annum. Adherents of this strategy invest their money in the most reliable instruments, these can be:
gold, platinum and other metals;
the most conservative mutual funds.
trading on dividends
The undoubted advantage of this strategy is the lowest possible level of risks. However, not everyone is satisfied with the level of profit.
Short-term or long-term
Investment strategies can differ in terms of the timeframe for implementation.
A short-term investment is an investment of capital for a period of up to 12 months. This allows you to save money in the face of inflation and even make a profit in a relatively short period of time. And in case of a jump in quotations, the investor’s capital can increase dramatically.
Instruments of short-term investment on the stock market include, for example:
- precious metals;
- mutual funds
IMPORTANT: Short-term investment instruments should have high liquidity so that they can be sold in the shortest possible time.
The profitability of short-term transactions most often fluctuates around 3-20% per annum.
Long-term investing involves investing capital for a long period of time – a year, two, three or more. Some investors believe that the investment horizon can go up to 20-30 years. The most important condition for this is the stability and reliability of the issuing company.
The potential profitability of such investment is about 20-30% per annum, which promises a good profit in the long term.
WARNING: In order to successfully use a long-term investment strategy, it is useful to study the experience of one of the world’s most successful investors, Warren Buffett.
Self-management or trust management (TM)
Investing can be differentiated by the way assets are managed. If an investor has certain experience and free time, he/she can act independently. In the absence of both, assets can be managed by a management company on his behalf.
Independent investing has a number of advantages, these are:
- minimisation of costs associated with investing;
- absence of restrictions on investment objects;
- independent making of investment decisions.
There are also disadvantages:
- the need to spend a large amount of time analysing assets,
- which does not guarantee its quality;
Trust management with the help of a management company has the following advantages:
- professional analysis and asset management;
- possibility of wide diversification with small assets;
- more favourable and convenient taxation.
Disadvantages of the method:
- high commission in favour of the MC, appraiser, auditor, etc.
Passive or active
These strategies also differ depending on the investor’s objective.
A passive investor collects and holds a diversified portfolio of securities. He doesn’t try to boost profitability by buying the highest yielding securities individually. It is easiest for him to invest in indices – a set of assets of the largest and most stable companies in an industry or country. This strategy guarantees effective diversification of investments and profitability close to the index return.
However, many investors choose an active strategy to earn more. They try to keep abreast of market trends, look for and buy undervalued assets, and try to guess the optimal timing of operations. Their portfolio consists of carefully selected securities, each of which, in his opinion, is bound to “grow”.
Depending on assets
The investment strategy may vary depending on the asset in which funds are invested, the reliability of the issuer, the economic and political situation in the country and in the world, the personal qualities of the investor and many others.
Thus, buying shares, he can calmly wait for the payment of dividends or earn on the increase in the exchange rate value, and can engage in speculation with high risk.
Investing in bonds, especially government bonds, one can calmly wait for coupon payments and a small profit on the maturity date, or one can buy high-risk securities of small companies in the hope of high profits and lose all investments.
Investing in currencies, you can make a small profit for years, and then suddenly earn a lot and quickly as a result of economic or political turmoil.
According to experts, cryptocurrencies are very volatile. They are able to grow in value many times over, but it is not worth investing more than 10-20% of available assets in them, because they can fall just as much. There is nothing but demand behind them, so they can be compared to an elementary pyramid scheme, and in case of a drop in demand, cryptocurrencies can cost many times less.
Whether it is worth copying other people’s strategies
Learning from the mistakes of others is always beneficial, so it is useful and necessary to study other people’s ways of investing. There is nothing wrong with imitating successful investors. Not only beginners, but also experienced traders do it.
What determines the choice of strategy
The choice of investment strategy depends on many factors. These are capitalisation, goals, investment horizon, attitude to risk and so on. In order to achieve success, it is probably not necessary to stop and fixate on only one of the strategies. You need to skilfully combine the most suitable ones and expect to make a profit.