Investment strategy is a term in financial management that refers to specific financial plan, rules, and approaches meant to guide an investor in making a selection from a number of investment opportunities, building and managing an investment portfolio profitably. The process of selecting an appropriate investment strategy must take into consideration the goals of the individual investor, the future needs for capital and the individual’s level of risk tolerance. Financial experts often describe investment strategy as a trade-off between risk and return among investors. While some investors may prefer to apply an investment plan that minimises risk, some may opt to maximise expected returns by putting much of their hard earned money into risky assets but the middle-of-the-road investment policy is often preferred by some investors as their investment strategy.
What forms of Investment Strategy are the best?
There are different forms of investment strategies and they range from active strategies like market timing which focuses on maximizing returns to passive strategies that minimizes costs which includes transaction costs. While some focuses on a rapid growth of the investment portfolio, some focuses on wealth protection and, hence, are safety investment strategies. An investor that is looking for an investment strategy that works consistently must not overlook the power of long-term investment strategy like buy and hold. A buy and hold investment plan is hinged on the believe that the equity market will yield a good return for the investor on the long run though market decline or volatility may occur in-between. Other forms of investment strategies include the following:
- Value Investment Strategy: The value investor looks at the stocks of companies that offer intrinsic value and yet are undervalued by the market.
- Growth Investment Strategy: The concern of the growth investor is the intrinsic potential of the stocks of a company for growth. Such investor considers the potential of the earning growth of a company to exceed the competition in the same industry and seek to maximise capital gain by buying into such companies.
- Contrarian Investment Strategy: An investor who is inclined towards contrarian investment will select good stocks when the market is in a decline and buy loads of them at lower prices with the hope of making a long-term profit when the market bounces back to a bullish trend. The idea here is to buy stocks of companies with good brand or durable competitive advantage during the period of a general market decline. Examples of companies in this category include those that produces goods used by each and every one or commodities with high demand by the generality of the population.