Before making your first investment, it is essential to understand different types of investing strategies. Various strategies are available, with different methodologies, objectives, risk-reward profiles, and investment timelines. There is no right or wrong strategy. The ideal approach depends on the individual’s investment goal, risk tolerance, and timeframe. Most investors adopt multiple strategies in their investing journey. Let’s look at these popular types of investing strategies.
Buy-and-hold / Passive Investing Strategy
As the name implies, this strategy involves investors buying and holding an investment for a long time. Many called this strategy ‘passive’ investing. Investors do not have to spend too much time maintaining the investment and just let it grow over time. This strategy seeks high-quality assets to be held for the long term while ignoring short-term market volatility. The premise is that if you buy a good quality asset, its value tends to increase in the long run.
This strategy involves spending more time doing the initial research to ensure you buy a good investment that can perform well in the long run. After you complete the initial work, you can spend less time ‘maintaining’ the asset. You just need to ensure your initial investment thesis still holds.
The passive investing strategy contrasts the active investing approach, where investors frequently buy and sell the investment. Active investors believe they can outperform the general market by being actively involved.
Growth Investing Strategy
This strategy usually applies to investing in stocks. The growth investing strategy seeks to invest in companies expected to grow faster than the market average. The profit comes in the form of share price appreciation.
While this strategy sounds good, investors should be aware of the potential risks associated with this investing strategy.
The most fundamental one is that growth is not guaranteed. Companies go through various phases during their lifetime. High growth is usually unsustainable over time and will eventually slow down.
Additionally, some of these high-growth companies have yet to be profitable. Yet, they command a higher premium for their share price and are being priced for perfection for their growth trajectory. As a result, the share price is usually more sensitive to future earning expectations and general market uncertainty. Therefore, investors must be comfortable with the higher volatility associated with growth investing. With higher risk, there is potentially a higher reward.
This growth investing strategy suits investors with higher risk tolerance and longer investing horizon.
Value Investing Strategy
This strategy is championed by Benjamin Graham and Warren Buffett. Value investing is a strategy of measuring the intrinsic value of companies and buying them when undervalued. It’s like bargain shopping! By buying when a stock is undervalued, investors take less risk because there is a higher chance that the price will revert to the intrinsic value over the long term.
As Benjamin Graham put it: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” Buying an undervalued company doesn’t mean it cannot go lower in the short term, but it will likely revert to its intrinsic value in the long term. This strategy is suitable for moderate risk-taking investors with a longer time horizon.
Income / Dividend Investing Strategy
This strategy seeks a regular stream of income. Many investment assets classes, such as dividend stocks, bonds, t-bills, fixed deposits, and real estate, can generate this steady cash flow. This income investing strategy suits investors who need regular income to help cover their expenses. This strategy is suitable for investors with lower risk-profile and shorter investment horizons.
Dividend Growth Investing Strategy
This strategy is a mix of dividend and growth investing strategy. The premise of this strategy is to invest in companies that consistently increase their dividend payouts yearly. Investors reinvest these dividend payouts every year to acquire more shares in the company, thus creating a dividend ‘snowball’ effect. Over the long term, the impact of compound interest on the principal and all the reinvested dividends will produce a massive growth in your investment value.
You can read our coverage of dividend growth stocks to learn how a simple investment into a dividend stock can generate massive growth over the long run.
ETF Investing Strategy
This strategy involves investing in an Exchange-Traded Fund (ETF) for the broad diversification that it provides to investors. ETF allows investors to buy a basket of stocks (or bonds, commodities, etc) at once. For example, buying a single ETF that tracks the S&P500 index will expose investors to the top 500 companies in the United States. That’s much easier than buying 500 individual stocks. This ETF investing strategy allows investors to diversify their portfolios with minimal effort.
Summary
There are many types of investing strategies investors can adopt. Most investors adopt multiple strategies during their investing journey. Each strategy has a different risk profile and ideal time horizon. Let’s summarize them here:
Objective | Risk Profile | Investment Horizon | |
---|---|---|---|
Passive Investing | Capital appreciation or regular payout | Lower | Longer |
Active Investing | Maximum capital appreciation | Highest | Shorter |
Growth Investing | Maximum capital appreciation | Highest | Longer |
Value Investing | Capital appreciation | Lower | Longer |
Income Investing | Regular payout | Lowest | Shorter |
Dividend Growth Investing | Capital appreciation | Lower | Longer |
ETF Investing | Capital appreciation or regular payout | Lower | Longer |
As always, what we covered above is just general information. Investors usually adopt some types of investing strategies that suit them best according to their investment objectives, risk profile, and investment horizon.