An investment strategy is a way to define your approach and goals when buying assets. Regardless of the types of securities you purchase (bonds, stocks, etc), there are several well-known tactics.
When it comes to investment strategies, every investor has their own preferred methods. Whether it's wearing a lucky hat and vetting every security to checking the news religiously. There is no necessarily right or wrong way to approach the practice. In fact, there are over half a dozen great investment strategies for investors to consider.
Growth investing focuses on building capital by investing in equities you believe have a high potential for increasing in price. This strategy is often used when an investor believes in the long-term value of the company underlying the security. It’s common to find growth stocks in emerging industries, such as the technology and medical sectors.
Typically, growth stocks break down into two categories:
Value investing – the favorite of famous investor Warren Buffet – focuses on stocks an investor believes may be currently undervalued. The allure of value investing is that when the market corrects for the undervaluation, investors can sell their stocks for much higher than they paid.
This strategy partially stems from the belief that the market can be irrational, which presents investors with a chance to buy stock at a “discount” and cash in on making the right call later. However, these returns may not materialize for years, which is why value investing is typically a long-haul game.
To be a successful value investor, you have to do your homework and learn not only the companies you wish to purchase, but the larger markets. This allows you to feel out when a company is underperforming compared to its competitors. When correctly implemented, studies have shown that value investing strategies outperform most growth strategies – when considered in time frames of ten years or more.
Momentum investors are data-driven traders who look for patterns and discrepancies in a company’s financial data to inform their purchasing decisions. The goal is to capitalize on improperly valued equities, be they over- or undervalued. On paper, this strategy works to investors’ advantage by racking up profits over months, rather than a period of years.
Income investing focuses on buying securities that provide a steady source of revenue. Rather than throwing money into equities that theoretically could increase in value – thereby increasing the cash-in value of your portfolio – income investing looks toward investments that provide immediate returns.
This investment strategy can be broadly divided into two categories:
Dollar-cost averaging (DCA) is a strategy that involves investing regular amounts of money in the market at regular intervals. Rather than helping investors select which securities to purchase, DCA is a tool that any investment strategy can easily utilize. The major benefit of DCA is that it prevents investors from attempting to time the market.
You can choose between a variety of investment strategies. We unpack them each in more detail on the Learn Center, too.
Learn more about growth investing here.
Read more about value investing here.
Understand momentum investing better here.
Dig into income investing here.
Study up on dollar-cost averaging here.
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