20 Feb What is the best investment strategy
It is perhaps the question I get asked the most, and one I’m always happy to answer: what is the best investment strategy?
When you begin your investment journey, you’ll encounter a huge range of different ideas about what the best strategy is. And ultimately, you need to decide what you are trying to achieve and then build an investment strategy that works for you.
Functional factors are important, including your capital resources, cashflow and expected return, but so are more abstract factors, like whether you want to include socially responsible or green investments.
What is the best investment strategy? All of them
One guiding principle I say to every investor is to use a strategy which spreads your risk and provides a portfolio with a mix of high and low risk investments.
Even a high-risk investor should have a portfolio that includes some elements which provide a steadier return, as this ensures some stability.
You should have a clear strategy, but it does not have to be one-dimensional or static. Try to have a mix of different approaches, as this will help you to make the most of the money you are investing.
Be realistic and get advice
Any investment strategy needs to be grounded in reality, because risk is such an integral part of what you are doing. Set yourself clear goals and limits on how much and why you are investing.
You also need to be aware of the mechanics of some investments, which may limit your ability to divest or have compulsory buy-out clauses. If in doubt, get advice from an experienced adviser.
Value investment strategy
Legendary American investor Warren Buffett made value investing perhaps the most popular way to approach investment strategy today.
The idea is to identify stocks which are cheaper than they should be. This is not as easy as it sounds, of course, and demands conscientious research and a deep understanding of a company’s fundamental value.
It also requires patience, because such stocks might not reach their potential for a long time. This strategy is great for long-term investors who have the time and resources to pick out such good prospects.
It is not usually a good strategy if you are looking for quick wins, but all investors should understand its principles.
Growth investment strategies
Growth investing focuses on finding companies which show signs of above-average growth. This strategy can be a riskier strategy than some of your other options but tends to bring excellent returns if successful.
Finding good growth investment opportunities demands a willingness to do thorough research on earnings and profit margins to see if a particular company has a history of real growth.
If you want to pursue a growth investment strategy, one of the best indicators of a good opportunity is a company which reinvests profits in the business rather than paying out a regular dividend to its investors.
Income investments are a low risk option
If you need your investments to return a regular income then an income investing strategy is one which is designed to provide returns on a steady schedule.
This approach reduces risk and ensures that at least part of your portfolio is grounded in a strategy which provide reliable income.
Examples of investments which fit an income investment strategy include bonds, mutual funds and dividend-paying stocks.
Even if you focus on higher-risk value or growth investing strategies, these fixed income investments should make up at least some part of your overall strategy.
Momentum investing means understanding trends
You will read a lot about how to pick stocks and funds which are sleeping giants or hidden gems, just waiting for you to discover them. But some strategies focus instead on how to identify and be part of positive momentum in the market.
The principle underlying a momentum investing strategy is that a stock tends to behave in a generally consistent way, and if its price is rising there is a good chance that it will continue to rise. Deciding when it will stop rising is a key to success with this strategy.
This strategy also demands a different type of skill and research, compared to value investing, because you need to understand what is driving a given trend so you can judge whether it will continue.
You still need to have patience and a long-term plan, because even upward trends might waver occasionally, and confidence in your research will see you through those moments.
Socially responsible investing
Our world and our society have changed in fundamental ways even from just a few decades ago, and investors should be acutely sensitive to this.
Scientific evidence of climate change or the economic impact of poverty are legitimate factors in your investment decisions. Many investors are actively pursuing socially responsible investing as result.
Research suggests that a socially responsible investment strategy can even produce abnormally high returns, although the reasons underlying this are not clear.
As with any other strategy, you can integrate socially responsible investments with other strategies. Your reasons could be financial, ethical or both; if you’re making profits it doesn’t hurt to know you’re also helping to save the planet or alleviate poverty.
Deciding what is the best investment strategy for you means sifting through and combining a mix of different strategies based on your resources, goals and mindset. Take the time to work out what you want to achieve, get good advice and then commit to do the research so you can make the best possible decisions.
Jean-François de Clermont-Tonnerre is Founder and Director of AUM Asset Management. The content contained in the article is for informational purposes only and is the opinion and experience of the author. You should not construe any such information or other material as investment or financial advice.