The best investment strategies
First published 25 September 2018 • Updated 25 September 2018
There are many reasons why you might want to invest. Equally, there are many ways to do it. The approach you take will depend largely on your goals, as well as on your circumstances and risk tolerance.
Most people start by thinking, ‘What shall I invest in?’ and consider a range of different asset types such as shares, bonds or property. However, equally important is the method that you choose – that is, your investment strategy. How you invest can be just as important as what you invest in.
What are the five main investment strategies?
Broadly, there are five basic strategies that you might adopt when investing. Each has its particular advantages and disadvantages, and some may be more suited than others to particular financial goals.
- General trading
Using technical analysis of the current trends and price patterns, you put money into various stocks at different times with the intention of making overall gains.
- Selective trading
Often used for short-term returns, this is about picking stocks that have a high chance of promising returns. They’re often called momentum investments, because they jump on the bandwagon of popular stocks that are currently doing well.
- Buy low, sell high
This is simply about buying stocks when they’re cheap and selling when they’re more expensive. The challenge comes from predicting which stocks are currently undervalued or due to attract more interest, so a knowledge of the market is particularly important.
- Long pull selection
Also called ‘playing the long game’, this is about choosing stocks that you believe will grow more quickly than the average over a number of years. One way to do this is to identify the most promising new listings, or seek out those companies with a history of strong growth but still unrealised potential.
- Dividend stocks
This strategy is about finding stocks that pay good dividends (a share of company profits) and holding them, to achieve a steady income stream. Usually you will hold the stocks for some time, but a variation of this strategy involves buying stocks and holding them just long enough to get the dividend, before selling them on – though this is more tricky.
What is asset allocation?
When investing you should always spread your investment across a range of different assets and asset classes, rather than putting all your eggs in one basket. Not only does this reduce the overall risk, but it also enables you to balance out different investments – so that when one type is falling, another may be rising.
This spreading of investments called asset allocation. It should be carefully designed and managed, based on your goals, risk tolerance and length of investment. You can do this yourself, but more often a portfolio manager will do it for you.
A typical portfolio might contain a proportion of high-growth, high-risk assets such as equities (shares), balanced with medium-risk fixed-income bonds and some low-risk, low-growth cash. The equities and bonds segments might be further divided into lower and higher risk types.
What level of investment risk should I take on?
Risk in terms of investments is ranked in four levels.
- Capital preservation
The lowest-risk approach, this is about simply preserving your money to ensure you get it back. You are looking to match inflation but little more than that.
You spread out your money between different asset classes to create a balance between risk and returns.
- Capital growth
You still balance your portfolio, but more of it (60-70 per cent) is in higher-risk equities in a bid to earn higher returns.
You aim for the biggest returns by putting over 70 per cent of your portfolio into high-risk equities. You should only ever choose an aggressive strategy if you have plenty of safer assets held elsewhere.
How can I manage my investment portfolio?
Once you invest your money, you have a portfolio to manage. The aim is to make the most of your investment by managing it in a way that generates income and balances risk with reward.
As your portfolio grows over time, some parts will grow faster than others. This means that you (or your portfolio manager) should regularly rebalance it to ensure that the mix of assets still matches your overall risk tolerance. Otherwise a portfolio that started with 30 per cent of its value in equities may end up with half its value in equities, which might be too risky for you.
You may also have the option of choosing an active portfolio management strategy or passive portfolio management. Active management comes with higher fees as it involves a fund manager actively chasing higher returns. However, there is little objective evidence that it is any more effective than passive management over the longer term.
How do I choose where to invest my money?
Your financial adviser can get you started on the road to investing and point you in the direction of suitable portfolio managers.
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