In this post, we present 20 different investment strategies. The best one will be the one that best suits your circumstances, preference, knowledge, risk appetite and time horizon. And chances are, you will want to combine several of these investment strategies.
- Buy & Hold
- Dividend Investing
- Dividend Growth Investing
- Fundamental Analysis
- Growth Investing
- Value Investing
- Average Down
- Average Up
- Cyclical or Defensive Sectors
- Investment in Specific Sectors
- ETF and Index Funds
- Dollar Cost Averaging
- ESG and Sustainable Investments
- Bonds and Deposits
- Real Estate
- Gold and Precious Metals
- Stocks and Bonds: 60/40
- Target Funds
- Dragon Portfolio
1) Buy & Hold
The Buy & Hold investing strategy consists of buying assets that look attractive to us and simply waiting. We are not seeking short-term rallies. We want to invest our money in things with a promising future. This means we will not sell or panic if there are heavy price declines.
While Buy & Hold can be done with any type of asset, stocks are the most popular asset class among buy & hold investing. The goal is to experience attractive returns in the long term. Stock dividends are simply reinvested to make the asset pot larger. Remember that time is one of the greatest allies of investors.
A good buy & hold investing strategy can focus on quality companies from around the world or global stock market indices. The latter option would also free our time as we would not need to research any stocks.
2) Dividend Investing
Dividend investing consists of investing our money in stocks that pay good dividends. It is important to make sure that these companies have a good track record when it comes to paying dividend. Therefore, it is very positive if dividends have continued to be paid during economic recessions in the past.
The ultimate goal of dividend investing is to have a large enough stock portfolio to be able to live off our dividends. Similar to real estate investors living off the rents they collect, a dividend investor will support their lifestyle with dividend income without having to deal with tenants.
A solid portfolio of dividend stocks will include some of the most established multinational companies in the world. They usually have stable profits and a strong financial position. The ideal characteristics for a dependable dividend-paying company.
3) Dividend Growth Investing
This strategy is similar to the previous one but adds an additional layer of complextiy. If we follow a dividend growth investing strategy, we will want to invest in companies that not only pay good dividends, but also increase them on a regular basis.
One of the great advantages of this strategy is that we focus more on dividend growth than on the size of the dividends today. As a result, our money will be invested in companies that still enjoy considerable growth rates.
Dividend growth investing is associated with long term objectives. Therefore, we also have time as our ally here.
4) Fundamental Analysis
Investors who follow this strategy conduct detailed analyses of the companies in which they invest. They do not usually have a particular preference as to what type of companies they want to own in their portfolio. For these investors, potential for gains and positive convexity are the two most important things.
While fundamental investors seek long-term returns, they are also willing to sell their positions at any time if they believe that a company’s situation has worsened, or if its price has risen significantly and they believe it is overvalued. Short- and medium-term decisions are part of achieving long-term returns.
Fundamental analysis is time-consuming. We try to always have the best companies in our portfolio. One of the risks of this strategy is updating our portfolio too often. Hence, the important thing is to do a good analysis and then wait for our thesis to play out.
5) Growth Investing
Investing in growth stocks means picking companies that are experiencing exceptional growth rates. They tend to concentrate in specific sectors such as technology, healthcare, and alternative energy sources. Though they can also be part of more traditional sectors.
Growth stocks often look expensive if we analyze them based on their multiples, such as the P/E ratio. But those valuations are usually justified those growth rates. It should be noted that investing in this type of companies can carry considerable risk, since they are less consolidated.
The best thing about investing in growth stocks is that a few companies of the ones we have invested in can generate outsized returns. This means we do not need all our stocks to perform well for us to achieve positive rates of return.
This strategy can be implemented by investing in shares of individual companies or though funds and ETFs that track stock indices dominated by high-growth companies, such as the Nasdaq in the US.
6) Value Investing
Value investors invest in stocks they consider “cheap.” There are two types of companies that can fall in this category. Some are mature companies for which the market is not willing to pay high valuations, often because of their lack of organic business growth.
The appeal of investing in these companies is to achieve stable and high returns. Thanks to their low multiples, if their business continues to perform well, these stocks can be very attractive. Many of them also pay good dividends. They tend to concentrate in more mature sectors, such as banking or energy.
The other type of value companies are those that are experiencing problems. Value investors may believe that the market has punished these stocks too much. For this reason, they are confident that their stock prices will recover in the future. This investing strategy was used by Warren Buffett in his early days. While still considered value, some people would say it is almost like distressed investing.
7) Average Down
Investors who average down increase their positions as they fall in price. They have such high level of confidence in some stocks that they are willing to buy more shares if the price deteriorates.
This strategy can be very lucrative if we pick the right stocks. But we must be extremely sure of our investment thesis. All things considered; the risks of averaging down are significant. A stock price decline may be justified by fundamental reasons, and we would be taking an ever larger exposure in that company.
Averaging down is also possible with more diversified investments such as stock market indices, precious metals or cryptocurrencies. That would usually carry less risk.
8) Average Up
Averaging up consists of increasing those positions whose price is going up. Even though we now buy them at more expensive prices, the logic is that assets that have gone up recently will continue to go up.
Averaging up can sometimes be called momentum investing. The momentum of a stock indicates how strong its current price trajectory is, whether bullish or bearish. The belief that an asset has entered or is in an uptrend can be based on both technical and fundamental indicators.
This strategy contrasts with averaging down, which bets on a change in trend and can be considered contrarian. Keep in mind that the same investor may decide to average up or down different types of investments depending on the theory they have developed for each of them.
9) Cyclical or Defensive Sectors
Stocks can be largely divided into two main categories, if we ignore those that are in the middle: cyclical and defensive. Cyclical stocks are companies whose business does well when the economy is growing. Though they also suffer the most when the economy is in bad shape. Car manufacturers and banks are considered cyclical.
Defensive stocks are companies that are not affected by the business cycle. Their business may not grow with the economy, but it does not decrease either. Hence, they are considered defensive and are often recession-proof. Utilities and consumer staples fall in this category.
This investment strategy tries to predict how the business cycle is likely to evolve. If the economy is set to boom, cyclical stocks will be favored. If the economy is set to enter a recession, defensive stocks will be preferred.
10) Investment in Specific Sectors
This investment strategy seeks to invest in those sectors that will perform best in the future. These investors are generally agnostic to the business cycle and make long-term bets. They try to put their money in those pockets of the economy that can benefit most from future economic, social and demographic trends.
For example, investors may be betting on the pharmaceutical sector, in order to profit from higher demand for their products as the populating of Western countries ages.
Technology and biotech are seen as innovative sectors that will do well. And even traditional energy producers, such as the oil business, may be favored by these investors if they expect the global economy to continue to depend on oil for decades to come.
11) ETF and Index Funds
ETF and index funds are passive investment vehicles designed to track the markets of our choice. They are an excellent option to invest our money in multiple companies at the same time and at a low cost.
While these funds are available for many types of investments, including many niche things, they are often used to invest in broad stock market indices.
Thus, ETF and index fund investors want to invest in the entire stock market without having to worry about analyzing individual companies, sectors or the state of the economy.
Investing in index funds and ETFs has historically been a very successful investment strategy. Some of the preferred stock indices for this type of investment are the MSCI World, the S&P 500, the Eurostoxx 600, and the MSCI Emerging Markets. Often, a handful of ETFs are combined to form a globally diversified portfolio.
12) Dollar Cost Averaging
Dollar Cost Averaging is about investing the same amount of money on a regular basis, typically every month, in the same asset mix. It is excellent for those investors who do not want to regularly worry about their investments, since the money is going to be invested regardless of the circumstances.
This strategy tries to avoid timing the market, i.e. guessing what will happen in the market in the short term. Thanks to that, Dollar Cost Averaging allows us to buy more assets when the market has fallen and less if it has gone up.
The Dollar Cost Averaging strategy can be combined with investing in ETF and index funds for outstanding results. It can also include bonds, precious metals and cryptocurrencies for a more diversified asset allocation.
13) ESG and Sustainable Investments
ESG and sustainable investing is about choosing those companies that are likely to be positive for the future of the environment and society. The acronym ESG indicates what things are important for this strategy: the Environment, Social aspects, and good corporate Governance.
An example would be renewable energy companies. More traditional companies that simply treat their employees well or have good governance policies would also fall within this category.
Another important aspect of ESG investing is avoiding certain sectors like tobacco companies or companies in the defense space.
The easiest way to invest in ESG-friendly stocks is to do it through investment funds, including ETFs. It is worth highlighting that there are many sub-strategies within the ESG space. Additionally, it is not only limited to stocks, as both government and corporate bonds can be included.
14) Bonds and Deposits
Investors who put their money into bonds and deposits are mainly looking for two things: security and interest income. To do this, they try to find the most attractive deposits, bonds and bond investment funds, including bond ETFs.
The idea is to try to maximize interest income, while minimizing the potential for capital losses. It is worth bearing in mind that some types of bonds are exposed to considerable risk, including credit risk and interest rate risk.
The actions taken by central banks in 2022 and 2023 have led to short-term interest rates being much higher than they were at any time since 2008. Therefore, it is possible to achieve attractive returns without to take almost any risks. One example would be 2-year US treasury bonds.
Some bond investors seek capital gains by buying riskier bonds. While returns can be attractive, this form of speculation should be left to those who know all the mechanics of the fixed income market. For more information on this topic, check out this section: Bonds.
15) Real Estate
Real estate is one of the most popular investment strategies. Generally, it is about buying properties to rent them out and profit from future price appreciation. This can be very lucrative if we believe that there will be long term inflation in our country.
For many investors, being able to physically see and touch their investments gives them a sense of security.
One of the great advantages of real estate investing is the use of mortgage debt. If we get cheap and long-term financing, the potential returns of our investments increase significantly. But remember that debt must be used wisely.
Another positive aspect is the control we get over our assets: we can manage the properties ourselves and carry out improvements. This contrasts with financial assets, such as stocks and bonds, which are controlled by people we do not even have access to.
16) Gold and Precious Metals
Investing in precious metals is another very popular strategy. Although there are different types of precious metals, it is mostly gold and then silver that are the focus of investors. Both gold and silver have been used as money for thousands of years and are therefore considered monetary safe haven assets.
Gold and silver have always managed to appreciate against fiat currencies in the long term. The amount of precious metals in the world is limited. And annual production levels are very modest. As a result, gold and silver are very good stores of value.
Investors in precious metals may see significant price appreciation if inflation stay elevated for a long time, or people stop trusting national currencies. This is what happens in emerging markets on a regular basis.
If you are interested in investing in gold and precious metals in general, check out the following section: Gold.
Cryptocurrencies are digital currencies not issued by any government or central bank. Thanks to this, they are not managed in the interests of any country or set of individuals. Consequently, they cannot be unilaterally devalued.
One of the best features of cryptocurrencies is that their quantity tends to be limited. In that regard, they share similarities with precious metals. And because they are electronic, it can be easier to buy and transport them. In fact, many proponents of Bitcoin refer to it as digital gold.
Cryptocurrencies benefit from irresponsible monetary policy and people’s loss of confidence in national currencies. While they can see spectacular returns, keep in mind that their price is extremely volatile and prone to severe drawdowns.
18) Stocks and Bonds: 60/40
One of the most popular investment strategies of recent decades was to combine stocks and bonds in a portfolio. To be more precise, 60% in stocks and 40% in bonds. That allows us to profit from stock market gains, without being too exposed to the risk of a recession.
The logic of the 60/40 portfolio is that if the economy is doing well, stocks go up and we make money. And if the economy does poorly, interest rates go down, pushing up bond prices.
This strategy has achieved extraordinary returns on a risk-adjusted basis since the early 1980s. This is because the subsequent four decades were a period of ever lower interest rates and stock market valuations.
Interestingly, 2022 saw the worst year ever for the 60/40 portfolio as interest rates moved aggressively higher and the stock market dropped quite considerably.
19) Target Funds
Target Funds are funds that adjust their investments in stocks, bonds, and other asset classes as time goes on. They are very popular for individual pension funds.
Target Funds start with a higher allocation to stocks in the portfolio. As time goes on, the weight in stocks falls and the weight in bonds increases. The goal is to always have a ratio of bonds and stocks that is appropriate for our age. Many target funds also include small allocations to commodities, cash and real estate.
The logic is that stocks have greater potential returns but also more risk than bonds. Hence, they are highly appropriate for younger people. Conversely, bonds offer less potential but are safer. As a result, they are more suitable for older people.
The great advantage of Target Funds is that our investment is in autopilot. The largest risk is that the transition from stocks to bonds takes place when stocks have just plummeted.
20) Dragon Portfolio
Finally, another investment strategy that we can use is the dragon portfolio. It is about building a portfolio that has the ability to generate strong long-term returns regardless of what happens in the future.
The original dragon portfolio, designed by Chris Cole, can be easily approximated by retail investors. It includes both developed and emerging market stocks, bonds, gold, silver, commodities and cash. It can be implemented exclusively with ETFs, making it a low-cost portfolio.
One of the best things about the dragon portfolio is that its probability of long-term success is extremely high. That is because we invest in a very diversified way, both in terms of asset classes and geographies. Therefore, its success is not dependent on the level of future economic growth, whether there is inflation or deflation, or which countries or sectors will dominate the global economy in the future
More information about the dragon portfolio for retail investors can be found on this link.
There are plenty of investment strategies available to us and all of them are valid. The important thing is that we choose the ones that are most suitable to us in terms of our financial position, level of savings, income, life circumstances, knowledge, risk appetite, desire to spend time updating our portfolio, etc.
The only wrong investment strategy is the one that is not appropriate for you. That is why it generally pays to be cautious when it comes to investing.
My only advice is for you to educate yourself as much as possible. Financial markets are interconnected. This is why acquiring knowledge about many areas of the market if so useful. Though you may not be interested in bonds, for example, being familiar with the fixed income market is extremely useful.
A proper understanding of interest rates and credit spreads will allow you to better navigate other asset classes, such as the stock market, precious metals, real estate or cryptocurrencies.
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