Investment strategy

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In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. These are often described as a tradeoff between risk and return: some investors will prefer to maximize expected returns by investing in risky assets, others will prefer to minimize risk, but most will select a strategy somewhere in between. Surveys show that investors do not believe this, and they expect to have low risk and high return. As a result, they often end up with a "buy-high, sell-low" strategy.[1]

Investment strategies are employed by investors who try to strike a balance between maximizing their profits from their portfolio and risk they are willing to take. While passive strategies are often used to minimize transaction costs, active strategies such as market timing are an attempt to maximize returns.

One of the better-known investment strategies is buy and hold. Buy and hold is a long term investment strategy, based on the concept that in the long run equity markets give a good rate of return despite periods of volatility or decline. A purely passive variant of this strategy is indexing, where an investor buys a small proportion of all the shares in a market index such as the S&P 500, or more likely, in a mutual fund called an index fund or an exchange-traded fund (ETF).

This viewpoint also holds that market timing, that one can enter the market on the lows and sell on the highs, does not work or does not work for small investors, so it is better to simply buy and hold. The smaller, retail investor more typically uses the buy and hold investment strategy in real estate investment where the holding period is typically the lifespan of their mortgage.

Strategies[edit]

The investment strategies that are normally employed by investors.

No strategy

Investors who don't have a strategy are known as sheep.[2]

Simulated monkeys

Simulated monkeys do better than the average investor.[3]

Past performance

One strategy is to select mutual funds based on past performance.[4][5][6]

Buy and hold

Buy and hold strategy involves buying company shares or funds and hold them forever. This is a long term investment strategy, based on the concept that in the long run, equity markets will give a good rate of return.

Value investment

The value Investing strategy looks at the intrinsic value of a company and value investors seek stocks of companies that they believed are undervalued.

Growth investment

Growth investment strategy looks at the growth potential of a company and when a company that has expected earning growth that is higher than companies in the same industry or the market as a whole, it will attract the growth investors who are seeking to maximize their capital gain.

Dollar cost averaging

The dollar cost averaging strategy is aimed at reducing the risk of incurring substantial losses resulted when the entire principal sum is invested just before the market falls.

Contrarian investment [7]

A contrarian investment strategy consists of selecting good companies in time of down market and buying a lot of shares of that company in order to make a long-term profit. In time of economic decline, there are many opportunities to buy good shares at reasonable prices. But, what makes a company to be considered good for shareholders? A good company is one that focuses on the long term value, the quality of what it offers or the share price. This company must have a durable competitve advantage, wich means that it has a market position or branding, wich either prevents easy access by competitors or controls a scarce raw material source. Some examples of companies that response to these criterias are in the field of insurance, soft drinks, shoes, chocolates, home building, furniture and many more.4 We can see that there is nothing “fancy” or special about these fields of investment: they are commonly used by each and one of us. Many variables must be taken into consideration when making the final decision for the choice of the company. Some of them are:

  • The company must be in a growing industry.
  • The company cannot be vulnerable to competition.
  • The company must have its earnings on an upward trend.
  • The company must have a consistent returns on invested capital.
  • The company must be flexible to adjust prices for inflation.

See also[edit]

References[edit]

External links[edit]

  • Wheel of fortune Design and test your investment strategy for a virtual wheel of fortune, optimize your strategies using different utility functions.
  • Virtual stock market Design and test your investment strategy for a virtual stock market, where three stocks and a bank account are available for investing.