January 9, 2021
5 types of investing strategies
Your Investment strategy is like your game plan to building your portfolio. But it is very important that you find the one that's right for your objectives and situation in life. Having an investment strategy is like having an instruction booklet guiding you through the investment process. It will help you discard many potential investments that may perform poorly overtime or that are not right for the investment goals you are looking to achieve.
- Value Investing
An investment strategy made popular by Warren Buffet, the principle behind value investing is simple: buy stocks that are cheaper than they should be. Finding stocks that are under-priced takes a lot of research on the fundamentals of the underlying companies. And once you've found them, it may take a few months or years for their price to rise. This buy and hold technique requires a patient investor who wants to keep their money invested for a few years. While the stock market has returned about 8% per year over the last 100 years, there are a few people like Warren Buffet whose stock picks have significantly outperformed the market. - Income Investing
A great way to build wealth over time, income investing involves buying securities that generally pay out returns on a steady schedule. Bonds are the best known type of fixed income security, but the category also includes dividend paying stocks, exchange-traded funds (ETFs), mutual funds, and real estate investment trusts (REITs). Fixed income investments provide a reliable income stream with minimal risk and depending on the risk the investor is looking to take, should comprise at least a small portion of every investment strategy. - Growth Investing
An investment strategy that focuses on capital appreciation. Growth investors look for companies that exhibit signs of above-average growth, through revenues and profits, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios. What Warren Buffet did for value investing, Peter Lynch did for growth investing. A relatively riskier strategy, growth investing involves investing in smaller companies that have high potential for growth, blue chips and emerging markets. - Small Cap Investing
An investment strategy fit for those looking to take on a little more risk in their portfolio. As the name suggests, small cap investinginvolves purchasing stock of small companies with smaller market capitalization (usually between $300 million and $2 billion). Small Cap stocks are appealing to investors due to their ability to go unnoticed. Large-cap stocks will often have inflated prices since everyone's paying attention to them. Small cap stocks tend to have less attention on them because: a) investors stay away from their riskiness and b) institutional investors (like mutual funds) have restrictions when it comes to investing in small cap companies. Small cap investing should only be used by more experienced stock investors as they are more volatile and therefore difficult to trade. - Socially Responsible Investing
A portfolio built of environmentally and socially friendly companies while staying competitive alongside other kinds of securities in a typical market environment. In today's modern world, investors and the general public expect companies to maintain some social conscience, and they're putting their money where their mouth is. SRI is one path to seeking returns that poses a significant collateral benefit for everyone.