Having an investment strategy is a key factor for success. Usually we take a lot of time to plan our personal daily life. Think about how much time you usually spend to plan your next vacation, research on the next smartphone to buy, or on how to improve your career. Have you ever put the same effort into your finances and investment strategy, e.g. to set-up a plan to grow your net worth long-term for your retirement?
Before you start investing your money, you should define a clear strategy, that you can follow and stick to for years. The basis of your strategy should consider following topics:
- What are the goals that you would like to achieve?
- Your personal obligations and situation in life
- Your age
I recommend you to be specific about the goals, that you would like to achieve and to quantify them. Your main goal could be to achieve an average annual return of 7% on your investments over the next 10 years, to amass €50,000 or €100,000, as a basis for a round-the-world trip with your family. Another goal could be to gather a passive income of €500 per month, to be able to work less on your day job and spend more time with your family. Or even becoming a millionaire over the next 40 years could be a meaningful goal. But don’t overdo it, define reasonable and achievable goals for yourself. Short-term intermediate targets can also help you to stay focused and motivated.
Thereby, considering your personal obligations in life will help you to define how much risks you want to take. Higher returns always accompany with higher risks. Thus, if you have a family, you might stick to a less risky investment strategy compared to someone, whom has no obligations. Moreover, as long as you are young, you can follow a riskier investment strategy, compared to someone short before retirement.
The problem of investing your money without a strategy is, that your success only relies on one factor, luck. But, a strategy that is well-thought-out will help you to choose the right assets to buy, to determine how much money you need to invest, to achieve your goals, to control your emotions and thus make the right decision in every market situation.
Let’s take a look on common investment strategies.
Day trading means to execute intraday trades actively in the markets, to profit from small price swings of an asset, or to say, buying and selling an asset in the markets within a single trading day. The objective is, to accumulate small profits from your trades and it often accompanies with high leveraged trading and thus high risks.
If done properly, day trading can be a very lucrative job, but it is the holy grail of investing, as you need to be very disciplined and experienced about trading and the markets. It demands a well-founded knowledge about trading techniques, technical chart analysis, risk management and market psychology and a clear overview about the current economic situation and factors that influence the stock market short-term.
The strategy of value investing involves buying stocks that are under-valued compared to its company’s intrinsic value and to avoid stocks that are over-valued. The idea is to buy these stocks when they are cheap and to sell them as soon as their price has appreciated. This strategy requires a lot of research about the fundamentals of a company you would like to invest in, e.g. the general economy outlook for its market segment, the business model of said company and its financial situation. Moreover, this strategy mainly concentrates on large cap stocks and thus accompanies with lower risks.
It is a classical long-term buy and hold strategy and acquires a lot of diligence and patience. Warren Buffett probably is the best-known value investor.
Growth investing, on the other hand side, is a more active strategy focusing on companies, that might show above-average growth rates and outperform the markets in the upcoming months or years, even if a company’s key figures imply, that its stock is over-valued already. It also requires well-founded research about a company’s fundamentals but concentrates more on its business model and competitive environment, e.g. to identify if expanding its business could lead to higher earnings and thus trigger price appreciation of a company’s stock.
Investing in trends and small cap stocks can also be considered as growth investing. In terms of the time frame, growth investing can be performed short-, mid-, and long-term. Due to the potential returns, growth investing is highly attractive to investors, but also accompanies with higher risks. Misinterpreting a company’s business model or an overall trend can lead to significant losses.
Income investing is a strategy, that concentrates on generating frequent and steady passive income and cash flow, rather than only increasing the value of a portfolio by price appreciation. It includes all asset classes that provide a reliable income stream, e.g. dividend paying stocks or bonds. Due to the fact, that your income stream will be consistent, even if the prices of your assets decrease, it is an investment strategy that accompanies with lower risks.
Like value investing, income investing is a long-term buy and hold strategy, but it mainly concentrates on generating high yields from your investments.
Dividend growth investing
Dividend growth investing is a form of income investing. It concentrates on buying stocks of companies, that are known for paying consistent and stable dividends for many years. Moreover, a key factor is, that these companies aim to increase their dividend payout year over year. By reinvesting such dividends, investors can benefit from compound interests long-term.
To identify such companies, it is important to analyze a company’s dividend track record. Usually dividend paying companies are more stable and its stock price is less volatile. It is a less risky long-term buy and hold strategy. In dependence on the stocks you buy, you can either generate yearly, quarterly, or even monthly dividend income.
These are the most common strategies to invest your money. Take your time to find out which one fits best to your personal life. There is no need to only concentrate on one strategy, you can also combine them and weight your allocation in dependence on the assets you buy. You can also check out My Personal Investment Strategy.