4 Investment Strategies You Must Know
Investment strategies assist investors in determining where and how to invest based on their expected return, risk appetite, corpus size, long-term vs. short-term holdings, retirement age, industry preference, and other factors. Investing plans can be strategized based on the objectives and goals investors want to achieve. Here are four investment strategies.
Value Investing
Investors who use this strategy look for stocks traded at a discount to their intrinsic value. Overvaluation and undervaluation are two possible outcomes. Overvaluation occurs when a stock’s trading price is higher than its intrinsic value. And undervaluation occurs when the stock’s trading price is lower than its intrinsic value. Investors buy stocks when they are undervalued and sell them when they have reached or exceeded their intrinsic value. The investor must be patient and wait for the share price to rise. Equity stocks, in general, carry a high level of risk. However, in the value investing method, investors identify undervalued stocks and purchase the most valuable shares on sale, reducing the associated risks. To reduce the risk, they use a margin of safety. When these shares are sold at or above their intrinsic value, the investors profit handsomely.
Growth investing
The holding period is chosen by investors based on the value they want to create in their portfolios. If investors believe that a company will grow in the coming years and its intrinsic value will rise, they will invest in such companies to increase their corpus value. Growth investing is another term for this. The holding period is determined by the investor’s preference. For example, how soon they want money to buy a house, send their children to school, retirement plan, and so on.
Momentum investing
Momentum investors ride the crest of the wave. They believe that winners should continue to win and losers should continue to lose. They seek to invest in stocks that are experiencing an uptrend. They may choose to short-sell if they believe those securities will continue to fall. Consider momentum investors to be technical analysts. It means they trade strictly based on data and look for patterns at stock prices to guide their purchasing decisions. Momentum investors, in essence, defy the efficient-market hypothesis (EMH). According to this hypothesis, asset prices fully reflect all publicly available information. It’s hard to believe this statement if you’re also a momentum investor because the strategy seeks to profit from undervalued and overvalued stocks.
Dollar-cost averaging
The practice of making regular market investments over time is known as dollar-cost averaging (DCA). You can choose to put $300 into an investment account every month with DCA. This disciplined approach becomes even more effective when you use automated investing features. When the process requires almost no oversight, it’s easy to stick to a plan. The DCA strategy has the advantage of avoiding the painful and futile market timing strategy. Even seasoned investors are tempted to buy when they believe prices are low, only to discover, much to their dismay, that they still have a long way to fall. When an investor makes regular investments, he can capture prices at all levels, from high to low. These recurring investments effectively reduce the average per-share cost of the purchases.
