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.[2] 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.

One strategy is to select mutual funds based on past performance.[3][4][5]


The investment strategies that are normally employed by investors.

No strategy

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

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[2]

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[2]

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.

See also[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.