An investment strategy is a set of rules – your game plan or style of investing, if you will – that guide how you pick your investments. There are many types of investment strategies, but here are some designed to help you build a portfolio that fits your risk tolerance and financial goals.
Investing well can help you build wealth, create a powerful income stream, and fund your retirement – but to achieve those goals as planned, without adding undue risk, you need the right strategy, the best investments, and time.
Poor investment choices, on the other hand, lead to underwhelming results. And it matters.
1. Growth investing
A growth investing approach is focused on picking stocks with higher growth potential compared to their industry or the market as a whole.
This strategy is well-suited for buying young or small companies but can be applied to larger companies with continued growth characteristics as well.
2. Value investing
A value investing strategy focuses on companies that investors believe are trading at a discount to the value of their assets or earnings.
Essentially, the stock price of the company is believed to be lower than it should be.
3. Income investing
An income investing strategy emphasizes investments that produce regular income rather than relying solely on increases in asset value.
Such a portfolio may consist of dividend stocks, bonds, cash equivalent accounts, and some real estate.
4. Diversification
Diversification is a basic investment principle designed to reduce the risk of any single investment or type of investment causing undue damage to a portfolio.
Diversification is achieved by owning a mix of asset classes (stocks, bonds, cash equivalents, etc.) and a variety of investments within each asset class.
Typically, investors can diversify easily by investing in mutual funds and ETFs.
5. Asset allocation
As noted above, owning multiple asset classes helps diversify a portfolio. The mix of different asset classes – known as asset allocation – can be managed in a variety of different ways.
- Passive asset allocation sets one mix and sticks to it at all times.
- Active allocation can vary the mix depending on market conditions.
- Target-date allocation sets an asset mix based on the investor’s planned retirement date, and then adjusts that allocation (becoming more conservative) as that date comes closer.
Where to Invest Money
Investors have thousands of investment options from which to choose these days, but they fall into these major categories:
| Categories | Investment Options |
|---|---|
| Stocks | Individual stock shares Stock mutual funds Stock ETFs Index funds S&P 500 index funds Dividend stock funds Nasdaq 100 index funds International stocks Small-cap stocks |
| Bonds | Treasury securities Government bonds Short-term corporate bonds Long-term corporate bonds High-yield bonds Municipal bond funds |
| Cash Equivalent Investments | High-yield savings accounts Certificates of deposit (CDs) Money market accounts Money market funds |
| Blended Portfolios | Balanced portfolios Asset allocation portfolios Target-date funds |
| Real Estate | Rental housing Commercial Real Estate REITs |
| Annuities | Fixed annuities Variable annuities |
It’s a good idea to narrow the field and focus on the types of investments you’re most likely to select for your portfolio.
You’ll want to understand how each investment performs and what types of risk it involves so you can make an effective decision – especially if you’re just learning how to invest.
Here’s a brief summary of what you might expect from each of the main investment categories listed above.
What Is Your Risk Tolerance?
Every investment involves an element of risk. You can’t avoid risk altogether, but you can manage it.
Deciding how much risk to accept is a personal decision that takes into account your time horizon and your risk profile.
With so many investment choices, a key to determining which is right for you is getting a handle on what types of risk you’re comfortable with. There are several ways to define risk.
Permanently losing money is an obvious one, but even temporary ups and downs can be damaging depending on how soon you need your money.
Then there’s inflation risk (where your returns don’t keep up with the rate of inflation) and longevity risk (where you might outlive your investments).
So, figuring out your risk tolerance starts with deciding what types of risk you are most sensitive to and how much of that risk you can take.
Since risk is most often defined by how well you can bear changes in the value of your investments, risk tolerance is often described in terms of low, moderate, and high risk.
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AUTHOR: Richard Barrington – Financial Analyst
