The world of investing is quite stylish. Literally. Every investor has their own unique and flashy way of investing in the market that they have developed over the years. More often than not, their investment strategy is based on their understanding of the market, risk tolerance, goals and access to capital. Usually, it takes a lot of trial and error to finally settle in for an investment style/strategy which works best for them.
In this article, we will go over some of the common, tried and tested investment styles and strategies used by investors all over the world. This should hopefully give you some inspiration and help you choose a strategy that aligns with your mentality.
But before we get started, as always, let’s start with you.
- What kind of an investor are you?
- Why are your investment goals?
- What’s your risk tolerance?
- What’s your approach to investing?
Asking yourself these questions will help you choose a style/strategy that suits you the best.
Investment strategies
Everyone needs a strategy, be it individuals, sports teams, businessmen, manufacturers, or even governments. The textbook says strategy is a plan of action designed to achieve a long-term or overall goal. But essentially, a strategy is playing your cards right for the best outcome.
In this context, your strategy should yield you the best financial gain. Each strategy has its own pros and cons and it is up to you to select the investment strategy that is best suited for you.
So let’s go over some of the most common trading strategies-
- Value investing
Value investing is an investment strategy where investors find and invest in underappreciated and lesser known stocks with the hope that the stock price will rise, as more and more people realize that the company is actually undervalued and appreciate the true intrinsic value of the company.
Value investing requires you to go into the market and search for companies that are undervalued but boast strong fundamentals. It is appealing to investors because. Firstly, it is risk free since you are already buying the stock at an undervalued rate. There is no guarantee the stock price won't fall further, but the chances are low. Secondly, you are able to buy these stocks at a discount to their intrinsic value in the market. The profit margin on these stocks is much higher than buying stocks at par. Lastly, defensive and patient investors love this strategy, since it’s relatively risk free as well as prospective.
But it’s important to recognize the shortcomings of the strategy-
- Value investing is a long term commitment. Meaning, it might take a lot of time for the stock to bear fruit. You would rather invest the same money in some hot stocks which might yield good profits in a smaller time frame.
- It is important to note that not all undervalued stocks will rise in value and be profitable. There is no guaranteed gain from such stocks.
Thus, Value investing requires a lot of market research and analysis, time and patience, commitment. If these conditions appeal to you, you could go for it.
Ps: Be wary of ‘value trap’ stocks. The prices of these stocks continue to drop, no matter how attractive the stock looks. Do your research right!
- Growth Investing
Growth investing is a bit of a gamble. This strategy requires you to identify upcoming companies, usually small and new startups that have a great potential to grow at an above average rate. Generally companies that have an innovative product/service, cutting edge technology, innovative business model, substantial market share or great access to resources tend to grow exponentially.
However, growth investing is risky too. There is no guarantee that the company will actually show growth in the near future. Yes, that’s right, near future- Growth investing is a short term strategy.
Growth investing involves investing in companies which have the potential to grow leaps and bounds in a short amount of time. But most companies, during their growth phase, are hesitant to give dividends because they would rather reinvest their profits to keep the growth momentum, than issue dividends to their shareholders.
Why should you choose growth investing?
- The returns on investment can be extraordinary. If you play your cards right and the company you invested in takes off, you stand a chance to double or even triple your initial investments.
- The companies in focus for a growth investor are those companies which have revolutionary idea, product, service, patent, etc-
By investing in such companies, we uncover the opportunity to make the society a better place. We help make the innovative ‘ideas’ into reality.
So, is growth investing the right strategy for you?
Medium to high risk tolerance because not all new and ‘innovative’ companies take off. Chances are that the company, with all its hype and potential, might fail to make hay while the sun shines.
Moreover, if the company grows exponentially in a very short period of time, chances are that the company is overvalued. The stock can be volatile and may undergo significant corrections. If there is minor turbulence in the market, such stocks tend to come down crashing. So be vigilant.
You will love growth investing if you have a high risk tolerance and have a keen eye on prospective companies with innovative products and services which might be ‘the next big thing’
Up next…
- Momentum investing
Momentum investing is all about capitalizing on the upward trends. Such investors actively seek companies that are gaining momentum in the market and invest in such stocks to make the most of the rising values. It is generally observed that stocks which are on a roll, continue to roll, rather than tumble abruptly.
In this strategy, investors usually sell their investments at the slightest hint of downtrend to avoid losses. During times when the market is bullish, you can earn substantial profits but the drawback is that this strategy does not work during bearish markets. Momentum investors generally purchase the shares which recently rose, in anticipation of continual growth. But markets are volatile and unpredictable. The tables might turn at any given time.
Lastly,
- Rupee-cost averaging investment-
If you are someone who wants to invest periodically and reap the benefits of a long term investment, then you could adopt this strategy. Rupee-cost averaging boils down to investing periodically, regardless of the market conditions. SIP is a form of rupee-cost averaging.
SIP- systematic investment plan is a disciplined approach where you keep aside a fixed amount of money each month, for investing. It builds a habit of saving and helps in mitigating the risk of market volatility up to a certain extent
This strategy is commonly used with mutual funds and exchange-traded funds (ETFs), allowing investors to accumulate shares over time without attempting to time the market.
If you are a passive investor with low risk tolerance, aiming for long term gains from investments, then you could choose this strategy. This also builds consistency and a habit of saving.
BUT
It may not capture the lowest market prices. You may need to be patient to see significant returns. Additionally, it requires a long-term commitment to reap the full benefits. You are also stripped away of a fixed amount of money every month.
Once set up, this strategy is laid back and requires minimal maintenance. This strategy can therefore be a passive investment strategy with consistent long-term results.
What to do?
The main intention from the above discussion is to help new investors, such as yourself, get an idea about these tried and tested investment strategies. Eventually, you have to select your own investment strategy which aligns with your goals, understanding, preference, risk tolerance, and so on.
With that being said, we have come to the end of the strategies. Now we move on to the stylish part of the article- Investment styles!
Investment styles
Each and every investor has their own style of investing. While strategies provide the broader framework, styles dictate the specific tactics used within that framework. Investment styles are a bit more personal and reflect the investor’s individual preferences rather than a set market trading strategy. We will go over some of the most common styles of investing, starting
- Active investing
Active investors are this breed of stock-market bros who laboriously buy and sell shares and other assets in the stock market throughout the day. Active investing requires constant monitoring of trends and being up to date with news from all across the sectors.
As an active investor, you have to exploit even the smallest market uptrends and proactively be ready to buy and sell shares at a moment’s notice. Your focus is on making short-term profits and maintaining liquid and flexible assets.
| Pros | Cons |
| Active investors essentially have to ‘beat the market’ using technical analysis to predict market trends. If done right, the returns are good. | This style requires expertise and years of experience in stock markets, technical analysis, and intuition and is not beginner friendly. |
| This style is flexible and the investors can quickly adapt to market volatility. | It is very time consuming and stressful, coupled with high transaction costs. |
- Passive investing
Passive investors are essentially the opposite of active investors. They are happy as long as they match the market returns with minimal trading. They run a marathon, unlike active traders who run a sprint. Passive investing aims to purchase and hold shares for a long term with minimal monitoring. As a passive investor you need to maintain a diversified portfolio to spread the risks evenly.
| Pros | Cons |
| Passive investing is cost effective and less intense. It is very beginner friendly and consumes less time. | Passive investing lacks flexibility to adapt to fluctuations in the market because you are not constantly monitoring the markets. |
| Passively managed mutual funds and exchange-traded funds (ETFs) tend to have much lower turnover than actively managed funds. | The returns may not be as attractive as other investment styles. Usually passive investors ‘buy to hold’. |
- Aggressive investing
Aggressive are the adrenaline junkies of the investing world. The mantra is usually ‘YOLO’, ‘All in’, ‘Win big or go home’. Aggressive investors have high risk tolerance. They go for high risk - high reward moves.
There are chances of losing significant money but the returns are equally significant. This style focuses on growth stocks, high-yield bonds, and speculative investments, and is often used by investors with a long-term horizon and high-risk tolerance. This style of investing requires a higher degree of technical analysis, research and active management and monitoring.
| Pros | Cons |
| Aggressive investing can yield substantial returns, especially in bull markets. This style is focused on making big profits in lesser time. | In a bearish market, aggressive investors might as well pack their bags and leave because the losses are severe. |
| It is ideal for investors seeking high growth potential with high risk tolerance. | This style requires high risk tolerance and a long term perspective. |
It is not recommended to try this style if someone is a beginner. Usually, seasoned investors who know the real deal go for aggressive investing. This style focuses on growth stocks, high-yield bonds, and speculative investments which are risky.
Lastly, we have
- Conservative investing
Conservative investors play it safe with their investment, taking as little risk as possible. As a conservative investor, you should aim at preserving your capital while also generating income through low-risk investments such as bonds, fixed deposits, dividend stocks and so on…
This style is suitable for investors who are looking for positive returns with minimal risk involved. The returns may be meager but the chances of making a loss is negligible.
| Pros | Cons |
| It provides stability and predictability, ideal for those with low-risk tolerance or nearing retirement. You have security of capital. | This style of investment suits investors with very low risk tolerance and whose aim is to have a small passive income with no risk of capital. |
| You expose yourself to minimal risk while also generating nominal income. | The obvious downside of this style of investment is that the returns are lower and the potential for growth is minimal. |
In conclusion
Investing requires careful consideration of strategies and styles to align with your financial goals, risk tolerance, and investment horizon. Whether you prefer a conservative or aggressive approach, active or passive investing, each strategy and style has unique benefits and risks. By understanding these options, you can make informed decisions to create a diversified and successful investment portfolio.
Happy investing!!!
