Investment strategies is the game plan to your portfolio. Use the one that's right for you and significantly increase your chances of success.
People extensively plan for their workday, a vacation, college financing, golf matches, buying a car, but they often forget about the most plan-required task of them all: investing. Investing your money without an investment strategy is like a football team going into a game without a playbook, although they are not required, they significantly improve your chances of winning. Creating an investment strategy is a seamless, number two step, after learning the ins and out's of stock quotes and how to buy them.
The Importance of Defining Your Investment Strategy
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.
When creating an investment strategy, it is important to quantitatively figure out what you are seeking to accomplish. Stating that you simply want to make money or become wealthy is not helpful. A better objective would be to say “I want to achieve an 8% average annual return on my investment contributions over the next 10 years in order to amass $200,000 that will be used to purchase a cottage home.” The more specific the objective, the better. And it doesn't stop there. An investment strategy is useless without a proper understanding of it. DIY.FUND helps you design your portfolio and oversee your investments to better understand and manage them. There are many different strategies that apply to different investment objectives, the key is pairing the right strategy with the right objective.
Once you have picked an investment strategy that works best for you, read this Motley Fool Review to see how it preformed.
5 Types of Investment Strategies
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 often takes a long time for their price to rise. This buy and hold technique requires a patient investor but should the right call be made, handsome payoffs could be earned. All investors should understand at least the basics of value 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.
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.
How Choose An Investing Strategy That's Right For You
Setting up your investment strategy is like buying a new car, before you look at the different models, you need to figure out what style suits you best. And just like cars, there are many styles to choose from when creating an investment strategy. When choosing the right investing strategy, there are questions that need to be answered first. What is your investment horizon? What returns are you seeking to achieve? What amount of risk are you able to tolerant? What are the funds in this investment to be used for? Answering these questions will ultimately also help in building your portfolio.
Determining what will be your breakdown between cash, fixed-income securities and stocks is a good start towards creating your investment strategy. The breakdown of your asset allocation ultimately depends on your risk tolerance. A conservative investor may prefer to hold 80% of his portfolio in fixed-income and 20% in stocks. The reverse would be true for an aggressive investor, while a balanced investor will follow a 50-50 split.
In terms of specific investment strategies within your asset allocation, if you are a high risk investor with a long investment horizon, you may want to include small cap and growth investing in your portfolio. If you have a moderate risk tolerance and shorter investment horizon, you may be more suitable for value and income investing. If you have a low risk tolerance and short investment horizon, you may want to focus solely on income investing. For those looking for companies that aim to do no harm, you can add socially responsible assets to your portfolio with relative ease. It is also important to adapt to the investment strategy you are most comfortable with. Someone with a knack for choosing growth stocks may make that strategy the priority in their portfolio.
*** SPECIAL ALERT -- June 27, 2020 -- THREE of this Year's Motley Fool Stock Picks Have Already Doubled! ****We have been tracking ALL of the Motley Fool stock picks since January 2016. That's 4+ years, 54 months and 108 stock picks. As of Friday, June 26th 3 of their 12 2020 stocks picks have already doubled (TSLA, ZM, SHOP). In addition, 4 of their 2019, 8 of their 2018, 7 of their 2016 and 10 of their 2016 picks have also doubled. Best of all, over these 54 months, the average stock pick is up 111%. That beats the SP500 by an average of 87%. And that's even accounting for all of this COVID mess that has wreaked havoc on some stocks but presented opportunity for other stocks. THAT is how the Fool does so well!
- Shopify (SHOP) – April 2, 2020 pick and it is already up 163%
- Zoom Video (ZM) – March 19, 2020 pick and it is already up 107%
- DexCom (DXCM) picked Feb 20, 2020 right before the market crashed and it is still up 26%
- Tesla (TSLA) picked January 2, 2020 before the crash and it is up 123% compared to the SP500 -7% so it is ahead of the market by 130%
- HubSpot (HUBS) picked December 5, 2019 and it is up 46%
- Netflix (NFLX) picked November 21, 2019 and it is up 42%
- Trade Desk (TTD) picked November 11, 2019 and up 111%
- Zoom Video originally picked Oct 3 and it is up 234%
- SolarEdge (SEDG) picked September 19, 2019 and it is up 44%
Normally the Fool service is priced at $199 per year but they are currently offering it for just $99/year if you click this link.
GET UP TO $1,000 IN FREE STOCK
WHEN YOU OPEN A ROBINHOOD BROKERAGE ACCOUNT
Robinhood was the first brokerage site to NOT charge commissions when they opened in 2013. They just past 10,000,000 accounts and to celebrate they are offering up to $1,000 in free stock when you open a new account.
Here's the details: You must click on a special promo link to open your new Robinhood account. Then when you fund your account with at least $10, you will receive one stock valued between $5 and $500. Then, you will get a link to share with your friends. Every time one of your friends opens an account, you will receive another free stock valued between $5 and $500. Click here to learn more about this Special Robinhood offer.
(before it's too late)