If you are looking to invest, you might be wondering which investment strategy will get you the best returns. Whether you’re starting with £500 or looking to maximise £100,000 sitting idle in your savings account, there are dozens of ways to get your money to work for you.
But which ones are right for you?
Having a strategy is essential if you want to see the best returns and want to minimise unpleasant surprises along the way. If you invest without a clear plan, you are far more susceptible to taking emotionally-driven risks and incurring avoidable losses.
What is an investment strategy?
An investment strategy is a plan that outlines what you will invest in, how much you will invest, and when you can expect to exit your investments.
There is no one-size-fits-all when it comes to finding the right investment strategy. Different investors have different goals and interests, and knowing what strategy is right for you depends on a range of factors.
These factors include:
- Age. Older investors tend to be more cautious as they approach retirement, while younger investors often take on more risk.
- Dependencies. Do you have family or children relying on you financially?
- Goals. What are you investing for: retirement, a home, education?
- Lifestyle. How much disposable income do you aspire to have?
- Financial situation. How much can you afford to invest?
- Expected returns. How long can you wait to see a return on your investment?
Understanding Risk
Before we look into the different investment strategies, it’s essential to understand the risks that come with investing.
Every investment carries risk, whether it’s a fixed-income producing bond or an equity venture. The golden rule is that you should never invest more than you can afford to lose, regardless of how much you plan to invest. Before you commit, it’s important to ensure that your living and personal expenses are well taken care of, so any losses are manageable.
The key challenge with investing is striking a balance between risk and reward.
High-risk investments typically produce the highest returns, but they also often bring an increased risk of serious financial loss. Lower-risk investments on the other hand produce lower returns, but they are usually more stable and predictable. A good investment strategy will always strike a balance between the two, taking into account risk tolerance and opportunity.
Types of investment strategies
Let’s take a look at 5 common investment strategies:
Growth Investing
Growth investing involves investing in companies that are expected to grow at a faster rate than the market average. Growth stocks tend to be in innovative fields like tech, AI, and renewable energy – all of which are hinged on future demand. Compared with other investment methods, growth investing requires a good nose for broader business trends in order to accurately predict what companies will soar. A smart growth investment would have been investing in Amazon in the 2000s, or in Tesla in the early 2010s.
Growth investing can bring high returns and significant capital appreciation, but it’s a long-game that carries increased risk. This is because investors effectively bet on the future performance of a company, rather than its current balance sheet. Growth stock investors are also unlikely to receive dividends, as many high growth companies reinvest their profits into the business for further expansion.
This is a suitable investment method for long-term investors who can afford to hold on to their investments until the company realises its full potential.
Value Investing
Value investing involves buying stocks and assets you believe to be undervalued. It helps to think of value investing as buying designer clothes at outlet prices, or finding a hidden gem at a flea market. This investment strategy is based on the assumption that the current market price does not accurately reflect the true value of the company. A good example of value investing is buying into a company that has recently faced a surface-level setback (a scandal, for instance), which has caused its stock price to slide despite its balance sheet remaining healthy.
Like growth investing, value investing is a long-term game that requires patience. It is however usually less risky than growth investing, because you buy the stock while it’s at a comparatively low price.
This is a suitable strategy for conservative investors who prefer to invest in companies that already have solid foundations.
Dollar Cost Averaging (DCA)
Don’t be confused by the name here, as this strategy applies in sterling, euros, yen and every other currency too. Dollar-cost averaging is an investment strategy that involves putting a fixed amount of money into a given investment at regular, specified intervals. This could mean putting £500 every month into a stock or fund, regardless of price and market conditions. It’s an effective way to reduce emotional decision making, because you remove the stress of waiting for the perfect time to invest. It also mitigates the impact of price swings, because your entry price averages out over a long period of time, particularly if you’re investing in a volatile asset like cryptocurrency.
The downside of dollar-cost averaging is that it can increase transaction costs if you’re buying little and often, rather than putting down one large payment.
This strategy is a suitable choice for most investors, but it’s especially appealing to those who want a simple strategy that manages risk effectively.
Passive Investing
A passive investment strategy is one that involves minimal active input from the investor. The goal here is to capture a diverse, broad scope of the market in a way that requires little day-to-day management. This might involve investing in a fund like an index tracker, which is essentially a basket of different stocks designed to track the performance of a specific market index or sector.
Passive investment opportunities are incredibly broad and can range from litigation funding to real estate crowdfunding. While passive opportunities tend to be less liquid than active investments, they help spread risk via diversification. Read our guide for further information on the differences between active vs passive investing styles.
This strategy is suitable for risk-averse investors who wish to take a more hands-off approach in order to grow their money.
Active Trading
Active trading involves buying and selling assets such as stocks, bonds, or cryptocurrencies, on a frequent basis – sometimes multiple times in a day (i.e. day trading). It’s a great way to turn over short-term profits, but it requires deep market insight and extensive financial analysis skills.
Active trading is more stressful than passive trading because it requires constant market monitoring. It is also high-risk, as it requires quick decision making which can be easily impacted by panic or excitement.
This is a suitable strategy for investors who are well-versed in financial analysis and have a high risk tolerance.
Real-world example
A good investment strategy will not rely exclusively on one technique. Instead, it will harness multiple methods, balancing risk with reward.
Your strategy must be unique to your circumstance and goals.
For instance, if your aim is to turn a $200,000 investment into $300,000 within two years, a wise approach would involve diversifying across high-growth stocks, income-generating bonds, and alternative investments such as gold or real estate. This strategy spreads risk while targeting growth.
Alternatively, if you’re looking to save up a healthy retirement balance over a 30 year period, a safe strategy might use a consistent dollar-cost average method to invest in both value and growth stocks, in addition to an alternative asset like oil or real estate. This decreases risk and helps minimise the impact of volatile market swings.
No two investment strategies are the same, which is why many investors turn to a financial advisor to help them formulate a plan that works best for them.
If you would like to learn more about our exclusive passive investment opportunities or speak with an experienced financial advisor, please contact us at MHG Wealth today.
