When it comes to investment strategies, choosing the best one can be overwhelming. The variety of possible strategies is massive, as they are always changing and growing. The biggest deciding factor while navigating the sea of options is your personal situation.
The reason there are so many different investment strategies is that they all serve different investing circumstances. There’s no one-size-fits-all strategy to get the best return with the lowest risk. It all depends on your resources, goals, and preferences.
Your Investment Portfolio
In this post, we’ll talk about some great strategies to consider in 2020 that will help you reach your investing goals. It’s important to remember the basics when it comes to portfolio construction. By having a strong understanding of your investment goals, risk tolerance, and time horizons, you or your financial advisor will be able to make the best decisions in constructing a well-rounded and diversified portfolio.
Eight Viable Investment Strategies
1. Value Investing
An investment strategy favored by Warren Buffet is one to take note of. One that he’s favored for 35 years, even more so. Put simply, value investing is a strategy in which the investor looks for stocks they believe are undervalued. You can also look at it like bargain hunting. Purchasing an undervalued stock can mean significant gains when the market eventually corrects itself.
The method for making well-informed value investments is fundamental analysis. It’s a technique that’s been around for a long time and it’s one of the more basic. This type of active investing strategy uses the financial statements of companies to determine the value of their stocks. An investor would compared the data in current financial statements to that of past statements and to information from by different companies in the same industry. It’s how you can identify stocks that are undervalued by the market.
This type of investing is subjective, and it often requires research to identify trends in the market. For those who don’t have the time to perform exhaustive research, there is also the option of investing in value mutual funds that contain multiple stocks thought to be undervalued.
This strategy works well if you have an interest in long-term investing. For time horizons that are longer than a decade, value investing almost always outperforms other strategies like growth investing.
2. Growth Investing
This strategy looks at a stock’s potential to increase in value over time. A company that has been growing and is projected to continue growing is a good candidate for this category.
There are a few smaller categories that we can break growth investing in to. The two most basic are short-term and long-term investments. This is fairly intuitive, but it’s worth noting the different ways you can use growth investments.
Short-term investments are stocks that you expect to sell within a year. These are companies that should experience quick and dramatic growth in value. Long-term investments are those that you’ll hold on to for longer than a year. These are useful for a company whose value you predict will grow more slowly and steadily over the years.
A notorious example of an industry with big opportunities for growth investing is the technology sector. It’s been one of the fastest-growing industries for years and of course we predict it to continue to grow. However, an investor would be wise to conduct thorough research before they buy stocks in a growing tech company. Flops in the tech world are a favorite to pounce on. For the investor willing to do their research, there can be large gains from growth investing in 2020.
3. Momentum Investing
Similar to growth investing, this strategy places great importance on current stock market trends. It assumes that stocks which are growing, or have momentum, will continue to grow. In the other direction, it assumes that stocks that are falling will continue to do so.
Momentum investors rely on technical analysis in making sound investment decisions. Technical analysis means using charts and data to identify current market trends and patterns. You would then use these trends to predict future performance.
This type of investing must be very actively managed. A readiness to buy and sell on short notice is essential for making the most of stock market trends. You could therefore make profits in a much shorter time frame with this approach, but they require quick thinking and constant vigilance.
4. Small-Cap Investing
Small-cap companies are those worth between $250 million and $2 billion. Investing in these companies comes with a few distinct advantages. As smaller companies, they don’t get the same attention that large-cap companies tend to get. The stock prices for large-cap companies can often be inflated because of all the attention they attract. This means that, for those willing to dig a little deeper, there are hidden opportunities for big potential growth.
This type of investing comes with its own risks, of course. Small-cap companies are usually younger and don’t have proven track records. They’re much more likely to fail than giant corporations and are thus riskier. So, you will have to take your risk tolerance into account when considering small-cap investing.
5. Income Investing
This type of investing takes a different approach from the strategies above. Instead of primarily aiming to increase the value of your investment portfolio, income investing is a way to see more immediate and consistent returns from your investments.
An example of ways investing can generate a steady income is stocks that pay dividends. These are stocks in companies that pay out a percentage of their profits to investors. Dividends are most commonly paid out as cash, but they can also take the form of shares of stock and other property. More investment options that pay dividends include some mutual funds and some exchange-traded funds (ETFs).
Another way to generate a steady income from investments is with bonds. Bonds are essentially a loan made by the investor to a company. In exchange for an invested sum of money, the company agrees to pay back the amount with interest at regular intervals. Bonds behave differently than stocks, and it’s wise to include both asset classes in your portfolio. Maintaining a diversified portfolio is timeless advice. It’s the cornerstone of determining the asset allocation that’s right for you.
6. Buy and Hold
The buy and hold investment strategy does just what it says. At its center is the belief in the value of long-term investments that provide more reliable returns than unpredictable short-term investments. With this strategy, short-term losses are weathered in favor of longer-term gains. Naturally, this strategy is most beneficial for those with longer time horizons.
This strategy is in contrast to more active management of investments, in which the investor is buying and selling stocks over a short period of time in an effort to buy low and sell high. Proponents of the buy and hold method make the case that avoiding the cost of making frequent trades yields a higher net return. How well this strategy fits the investor depends heavily on the investor’s timeline and how actively they want to manage their portfolio.
7. Index Funds
Investing in index funds aligns with the above mentality of buy and hold. It makes for lower risk, requires less active management, and is most productive in the long run. An index fund is a type of mutual fund or ETF that holds many securities in a specific index. The aim of these funds is to match the performance of the index benchmark as closely as possible.
An advantage of investing in an index fund is that it’s easy, inexpensive, and you’ll gain a diversified selection of securities. The diversity of the funds in an index fund is also its strength; it provides the investor with a safety net against big losses.
Another advantage these funds provide is that they don’t require much management. This means paying significantly less in management fees, which means a higher total return.
There are some downsides to index funds, however. The fact that they’re passively managed means that your money is at the mercy of the market fluctuations. This makes them a better choice for people with long time horizons. The idea with index funds is that long-term gains will outweigh any short-term losses.
8. Socially Responsible Investing
Seeing the highest returns possible from investments is a primary goal for many investors, but it isn’t the only thing to consider. More than ever before, investors are drawn toward socially responsible investments. These are investments in companies that have a positive social impact.
If the idea of having a positive impact on the world through the investments you make is attractive, this type of investing might be perfect for you. Each year there are more socially responsible investment options than the last, and they’re performing well. 2020 could be a great year to put an ethical spin on your investment strategy.
Find Investment Strategies That Align with Your Values
Your investment strategy is a major part of having control of personal finance. To make investing work for you, be sure to consider the many different possible strategies and how they align with your goals, needs, and values.
In many cases, finding the right wealth manager is the best move you can make. Expert guidance in the world of investing provides peace of mind and better performance. Whether you’re reexamining your investment portfolio or approaching it seriously for the first time, make 2020 a prosperous year.
Saddock Wealth can help you with investment strategies! Contact us here to schedule a meeting to discuss your wealth management goals.