What are Investing Strategies?
Investment or investing strategies are sets of rules followed while making financial investments. Strong investing strategies based on long-term goals and risk appetites are essential before making investment decisions. Since there are no guaranteed returns on investments, investing strategies prepare investors to meet unforeseen challenges in investments. A balanced investment strategy is generally one that feeds long-term objectives and allows some risk tolerance.
Investing strategies constitute a part of the financial discipline. Investing strategies follow a definite procedure or behaviour pattern guiding individuals and institutions towards choosing their investment portfolios.
Types of Investing Strategies
Investors have different financial objectives, risk profiles and time frames and will employ suitable investing strategies to achieve the best results.
Aggressive investing strategies: Aggressive or active investing strategies are geared towards maximising returns on investments. Aggressive investors typically focus on high profits over a short period of time and base their investments on proper market timing to achieve desired results. This usually involves buying investment instruments at low prices and selling them at high rates depending on the rise and fall of instrument value.
Conservative investing strategies: Conservative or passive investing strategies attempt to minimise transaction costs. Conservative investment instruments include bonds, fixed deposits, money market, etc. Usually requiring more time to secure returns, passive investment is not a feasible method towards accumulating long-term wealth.
Investing strategies for small time investors: Small time investors employ a type of conservative investment plan called ‘buy and hold’. Investors employ the ‘buy and hold’ strategy to invest in equities that give long-term returns despite being volatile. Small time investors typically hold on to equities for very long periods.
Value investing: The value investing theory was propagated by Benjamin Graham, the American professional investor and economist. Value investing concentrates on an investment strategy whereby the investor purchases a company’s shares without considering the stock market scenario, or any other financial, or political factors. An investor discovers ‘value investing’ if he/she were able to acquire stock at less than its actual future worth.
Formulating Investing Strategies
It is widely accepted that the right investing strategies will benefit an individual manifold, often surpassing investor expectations. The following are some basic principals on which successful investing strategies can be designed:
Maintaining a good safety margin and exercising rational disposition towards price: This involves conservative assumption of valuations; practicing caution in the area of estimating future growth of investments. According to Graham, the chief risk of investments lies not in overpaying for good business but for mediocre business doing well under prosperous market conditions.
Keeping a safety margin also requires purchasing assets at discounted rates to conservative assumption of value. Once a value estimate has been drawn, investors should concentrate on maintaining a wide price margin at the time of purchase of assets. This usually means waiting for asset prices to fall substantially before their purchase.
Investing in markets one understands and recognising one’s own limitations: Investments should be made in an industry the investor is familiar with. Unless investors know the economics of a particular business, he/she will not succeed in forecasting where a business will lead to in future. Knowledge helps avoid risks to a great extent.
Investor success is dependant on performance of the business invested in: This principal requires use of common sense and not economic pedantry. If a business cannot continue to exist in the market, investors stand to lose everything.
Avoiding frequent activity: Frictional expenses, or frequent trading, are the enemy of long-term superior results.
Popular Areas of Investment – Why Investing Strategies are required?
The financial market contains diversified investment instruments, each highlighting specific risks and returns. Investing strategies are investment plans that include essential advice offered by fund managers before investments. An investor may choose to invest in any of the following financial areas:
Shares: Issued by large corporations, shares (also referred to as stocks, securities or equities) are highly profitable and risky investments that allow their owners (shareholders) part ownership of a company. Shareholders receive returns on investments either as dividends or as profits gained after selling shares in the stock market. Because of the high risk exposure, investors are required to develop effective investing strategies before investing funds.
Mutual Funds: Mutual funds are diversified investment schemes that encourage investors to invest in diverse financial products like shares, bonds, securities, etc. Because of the diversification of investments, mutual funds expose investors to less risk and high profits. Mutual fund investing strategies involve extreme market research, a good investment plan, efficient fund management, and important decision-making with regard to investment instruments.
Real Estate: Real estates are tangible assets that provide their owners the rights of possession, control and transfer of property. Real estate investments generate income from lease, rental or capital appreciation of funds. A long-term investment, real estate involves substantial amounts of money transacting over an unpredictable financial market. Strong investing strategies are crucial to real estate property deals. Whether aiming profits out of rents, REITS or real estate trading, the right investing strategies will help conclude investment decisions through evaluation of investor funds and risk capacity.
Hedge Funds: Similar to mutual funds, except functioning without strict Government regulations, hedge funds allow diversified or specialised investments in real estate, commodities or public company buyouts. Outpacing their investment counterparts, like mutual funds, hedge funds offer high profits through extremely fast turnover investments. This makes them extremely risky as well, for should a series of bad investments ensue, investors can lose finance just as rapidly as they gained returns.
Investments involve high-risk tradeoffs. High risk investments like real estate and hedge funds offer higher returns than low-risk, low-return investments like bonds, mutual funds, etc. Since the goal of every investor is to gain profits on initial investment, value investing strategies are ideally ones that help decide the best instrument for investment through an estimate of returns and risks associated. The magnitude of importance of professional investing strategies cannot be gauged against investor security.
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