Investing Strategies: Which Is Right for My Investment Plan?
by Gabriel Lewit
Finding an investment strategy that is right for you and your investment plan can be difficult. There are many variables you will want to pay attention to. And the investment strategy that is best for someone else you know might not necessarily be compatible with your goals and constraints.
As you determine what strategy is best for you, it’s important to consider what you hope to achieve. Are you focused on short-term growth? Are you trying to build a retirement account? How much time have you allotted to achieve your goals? Additionally, you’ll need to be familiar with how much risk you can tolerate, as well as how much time you (or your advisor) can dedicate to your portfolio.
The answers to these questions and more will help you determine what investment strategy to pursue either on your own or (more advisedly) with the help of an advisor. To get you started, we’ve compiled brief descriptions of a few popular, modern investing strategies:
Active Versus Passive Investing
Over the past 90 years, the S&P 500—arguably the most important stock index in our economy—has yielded an average annual return of 9.8 percent. In any given year, many investors will use this index as a baseline to evaluate whether they are “behind” or “ahead,” then tweak their investment strategy accordingly.
Active investors choose specific stocks and stock indexes—usually relying on either technical indicators, fundamental analysis, or a broad investment philosophy—and hope they can come out ahead.
Passive investors, on the other hand, will assume they can’t “outsmart” the market, which is unpredictable. Instead, these investors focus on diversification and positioning themselves to enjoy the growth of the market as a whole. Passive investors employ a long-term approach, whereas active investors typically, though not always, have a shorter-term approach.
Value investing involves finding specific, individual assets that are currently underpriced. This strategy holds that underpriced stocks – that is, stocks where the price doesn’t match the company’s value- will pay off in the long term, as the company grows and achieves its potential.
Discovery of those stocks can require thorough research and close monitoring of both the market and business profiles in order to determine when value supersedes price. However, there are also mutual funds composed of what are estimated to be value stocks. Spreading investment across a mutual fund, rather than dumping all of your eggs into the baskets of one or two companies, can help mitigate risk.
Warren Buffet is perhaps the most well-known value investor. Buffet, who has a net worth of over $75 billion, is perhaps the most successful investor of all time.
This investing strategy seeks to identify emerging companies that are poised to excel in their industry. An example might be Netflix. In the company’s early days, it offered something that no other company in the entertainment industry was offering. Thus, the company’s stocks had huge upside potential.
Of course, it’s also important to consider the health of a business when growth investing, not just the quality of the idea that informs the company’s offer to the consumer. That’s because, when a business is mismanaged, even a good idea can’t salvage it.
Investors who pursue growth stock investing anticipate growth stocks to appreciate more quickly than the stocks of established companies.
Momentum investors use data and complex calculations to attempt to determine the best times to buy and sell. In essence, they believe that stocks that are rising will continue to rise, while stocks that are falling will continue to fall.
Often, this strategy requires an investor’s dedicated attention to the market’s gyrations. Typically, gains and losses occur over days and months, rather than years and decades. Momentum investors also need to be prepared for the high trading costs that will come with frequent buying and selling.
This strategy might be combined with any of the strategies listed above. It involves increasing investment funds at regular intervals, rather than trying to time purchases with the market’s highs and lows. The regularity of purchase averages out the highs and lows of prices.
There’s a considerable amount of emotion tied up in investing. It can be tempting to sell low and buy high, just as it’s not always possible for investors to accurately gauge their ability to predict portfolio performance.
The automated nature of dollar-cost averaging can offset the irrationality that our human shortcomings introduce to our investment strategies.
That being said, a body of research that has been growing since the 90s suggests that dollar-cost averaging does not exceed (or even match) the returns generated by a lump sum investment approach. It is best applied when the investor is nervous and very prone to emotion-based decisions that can lead to losses.
SGL Financial’s Investment Philosophy
At SGL Financial, we believe in applying evidence-based, modern, theory-driven portfolio management with an active overlay. We strive to keep investment costs low, minimize turnover and taxes, and – of course – maximize returns.
SGL’s team members prioritize proper asset allocation to help clients weather stock market storms and to tailor their portfolios to their risk tolerance and time horizons. Most importantly, SGL Financial engages in a long-term investing approach. It’s not possible to predict what will happen next, and so we believe the most responsible (and, in the long-term, profitable) strategy is to practice discipline and patience.
Our firm is a holistic, advisory business, meaning our team members are well-versed not only in investing but also in the many facets of financial planning that should inform your investment plan. We offer fee-transparent, personalized services that take a holistic approach to our clients’ financial futures.