Have you ever watched a live football match? Surely you have noticed how the coach constantly thinks about strategies; figuring out how to use his players to find the best scoring opportunity. The same thing happens in the world of investments. You are the coach looking for investing portfolio strategies that best suit your resources and opportunities.
You are probably not putting the World Cup championship on the line when looking for stocks to invest in. However, developing an appropriate investing strategy can help you improve your financial life and increase your wealth.
If buying and selling stocks in financial markets sounds confusing to you, get ready to learn five investing portfolio strategies that will help you clarify the picture. Once you become familiar with each one, you will be able to choose the one that best fits your investor profile.
What are investing portfolio strategies?
An investment strategy is the set of principles that help you make the right decisions to achieve your financial goals. It is the game plan to follow based on your investment objectives, your risk aversion and your money needs.
Imagine that you are the coach on the side of the field directing your favorite team’s game. Every decision you make will affect the result. However, to make the right decisions, you must know in advance what your game strategy is.
Do you need to score a goal to tie the game? Do you have to strengthen your defense to protect a positive result? Do you prefer to keep possession of the ball or give it to your opponent?
Translating this example into financial terms, you should know what you want to achieve with your investing portfolio strategies. Do you need to be offensive to generate a source of income? Are you looking for a defensive strategy to protect your savings? Do you prefer an active buy and sell strategy or are you more comfortable with long-term investing?
Every move you make with your money will be to achieve your financial goals. Your investment strategy will provide you with certain parameters that will help you determine which players to put on the field, or in this case, which stocks to add to your portfolio.
As you will see, investing is not about betting your money on the financial markets and hoping to get results. Your strategy will help you decide how to use your money, what stocks to look for, when to buy and sell, among others.
Key considerations before choosing a strategy
There is an important step to take before delving deeply into investing portfolio strategies. Before choosing what the game plan will be, we need to consider some important points.
- Identify your financial situation: Make sure you maintain a monthly budget to know exactly your monthly income and expenses. From there, you will know how much money you can use to invest each month.
- Set your goals: Each investor goes through a different financial situation, therefore, each one will have different objectives for their money. Make it clear what you want to achieve with your investments.
Are you looking for quick returns to buy a house, for example? Or are you looking at long-term investing to save for retirement? Whatever the reason, be sure to clearly identify the goal you are pursuing with your investment strategy. - Evaluate your risk aversion: The investment strategy you choose may vary depending on how much you are willing to risk. It is recommended that the younger you are, the more risk you take because you have time on your side to recover from potential losses.
Good. Now that we’ve laid the proper foundation, let’s look at some investing portfolio strategies.
Investing portfolio strategies
Value investing
Value investing involves looking for shares of companies that are trading for less than their intrinsic value. It’s like searching for sales in the market, which is why investors using this strategy are considered bargain hunters.
They are aware of market movements and know how to correctly interpret financial statements. Their goal is to find companies with solid fundamentals and a long-term perspective, but whose share price has been temporarily depressed due to volatility.
This strategy usually goes against trends. Instead of opting for stocks that are on the rise, stocks that present apparently unfavorable numbers are chosen. Although they appear to be random plays, these decisions are supported by fundamental analysis principles that allow to determine whether they are good investments or not.
Should you use value investing?
Value investing can be one of the investing portfolio strategies to consider if you hope to invest with a long-term vision. If you decide to buy shares of companies considering their intrinsic value, you will likely have to wait several years for their growth.
A great example of a value investor is the legendary Warren Buffett. A few years ago, he explained in an interview his decision to invest in airlines even though the industry “had a bad century”. His vision was that in the coming decades the demand for flights would increase, and with it, the value of their invested capital.
Knowing fundamental analysis techniques can be very helpful in identifying stocks trading below their intrinsic value.
However, if you don’t have as much experience with this type of research, you can use the Price-to-Earnings Ratio or P/E Ratio. Value investors look for stocks with a low P/E ratio. A lower ratio means you would pay less for each dollar of earnings.
Growth investing
Growth investing buys stocks of emerging companies that appear poised to grow at an above-average rate. Think of it as a football team betting on young players who promise to be world-class figures in the future.
These companies often have something special, whether it’s an innovative product or a unique service that sets them apart. The beauty of growth investing is that if these companies take off, your investment will increase quickly.
Compared to other investing portfolio strategies, the disadvantage of growth investing is its lack of dividends. Generally, companies in growth phases use their capital to sustain their evolution. This doesn’t leave enough funds available to distribute among shareholders.
Should you use growth investing?
Growth investing carries a relatively higher risk than other investing portfolio strategies. Practically, you would be investing in the next big thing on the market before everyone else.
Because of its lack of dividends, value investing could be ideal for you if you don’t expect a flow of money from your investments. In addition, companies in growth phases tend to be smaller, so they are more likely to go bankrupt. If you choose growth investing, it would be better to have a steady income as there is a higher risk of losing your capital.
Active trading
With the active trading strategy, investors buy and sell stocks in a matter of months, weeks, and sometimes on the same day. Instead of holding the investment for the long haul, the goal is to profit from short-term price movements.
You probably imagine the typical scene of Wall Street investors shouting “Buy! Sell!”. The appeal of active trading is its potential to generate profits quickly. However, that may also involve greater risk and requires a deeper understanding of the market.
Unlike long-term investing that looks for the fundamental value of stocks, active trading uses technical analysis. Investors look to buy and sell stocks based on past performance to predict future trends.
Should you use active trading?
To focus on active trading above other investing portfolio strategies, you need to stay up to date with trends in the financial markets. Reading a headline on a news portal can make the difference between losing and winning due to a decision to be made in a matter of minutes.
Likewise, the skill to make decisions can be of great help. For active trading you need to quickly decide whether to buy or sell to profit from market volatility.
Active trading may be right for you if you have experience investing with margin. Margin is an amount of borrowed capital that investors use to boost their results. It is considered a double-edged sword because, just as it can generate greater profits, it can also amplify losses. Be sure to only choose this alternative if you are comfortable handling a high level of risk.
Index investments
Investing in indexes is the long-term investment strategy at its best. It is a passive investment method that focuses on generating results similar to market indices such as the S&P 500 or the Dow Jones Industrial Average.
Index investors claim that, due to taxes and transaction fees, it is virtually impossible to “beat the market” by constantly buying and selling stocks. Instead, they aim to mimic the inherent returns of financial markets through instruments called index funds.
For example, they do not analyze stocks of trending companies one by one. Instead, they invest in a Dow Jones index fund. That way, their investment will have results similar to the performance of the 30 largest companies in the US.
Should you use index investments?
Unlike the rest of the investing portfolio strategies, investing in indices could be right for you if you have a high risk aversion. By investing in indices, you diversify your portfolio with a wide selection of assets, rather than concentrating it on just a few stocks. This helps reduce the risk related to a specific company or industry.
Remember we were talking about Warren Buffett? Well, he is one of the best investors of all time and recommends investing in indices. Buffett assures that, by investing frequently in indices, any beginner investor could obtain better results than a professional.
Maintaining a long-term investment through indices can free you from the stress of market fluctuations. Additionally, index investing has historically generated better results than actively managed funds.
Dollar Cost Averaging
Among all the investing portfolio strategies, this may sound like the most complicated. But don’t worry; it’s much simpler than it seems.
The DCA strategy is based on investing regularly without considering the volatility of financial markets. Investors who use DCA allocate a specific amount of money to their investment account periodically.
The DCA method is not mutually exclusive from other stock market investment strategies. For example, an investor could use $150 to invest each month and use it strictly in growth company stocks or an index fund.
By being disciplined with this strategy, the investor will buy stocks at various price levels. With a specific amount of money, you will purchase more shares when the price is low. Consequently, you will be able to buy fewer units if the price rises.
Should you use DCA?
Regardless of the complementary investment strategy, using DCA is a wise decision for any investor. Like most investors, you probably don’t have a million dollars to invest. Developing the habit of investing regularly will allow you to use small amounts to build your wealth one dollar at a time.
To invest with DCA successfully, you will need a stable income. When working on your monthly budget, make sure to allocate a percentage of your income to your investments. Moreover, you can set up a recurring transfer of funds to your investment account to make this process easier.
How to start investing
Do you remember we were looking at your investment goals? Now that you know some investing portfolio strategies, take your goals into account to choose the option that best suits what you are looking for.
For example, let’s say you want to generate a source of income with your investments. Maybe investing in growth stocks or index funds is not the best alternative. Instead, you could combine value investing with DCA to buy shares of companies that pay dividends.
Once you choose your investment strategy, you can start investing with the FlexInvest platform. There you’ll find hundreds of stocks and investment funds in financial markets from all over the world. And with its fractional shares feature, you can start investing with just $5.
