What Is an Investment Strategy?

The term investment strategy refers to a set of principles designed to help an individual investor achieve their financial and investment goals. This plan is what guides an investor's decisions based on goals, risk tolerance, and future needs for capital. They can vary from conservative (where they follow a low-risk strategy where the focus is on wealth protection) while others are highly aggressive (seeking rapid growth by focusing on capital appreciation).

Investors can use their strategies to formulate their own portfolios or do so through a financial professional. Strategies aren't static, which means they need to be reviewed periodically as circumstances change.

Key Takeaways

  • An investment strategy is a plan designed to help individual investors achieve their financial and investment goals.
  • Your investment strategy depends on your personal circumstances, including your age, capital, risk tolerance, and goals.
  • Investment strategies range from conservative to highly aggressive, and include value and growth investing.
  • You should reevaluate your investment strategies as your personal situation changes.

Understanding Investment Strategies

Investment strategies are styles of investing that help individuals meet their short- and long-term goals. Strategies depend on a variety of factors, including:

  • Age
  • Goals
  • Lifestyles
  • Financial situations
  • Available capital
  • Personal situations (family, living situation)
  • Expected returns

This, of course, isn't an exhaustive list, and may include other details about the individual. These factors help an investor determine the kind of investments they choose to purchase, including stocks, bonds, money market funds, real estate, asset allocation, and how much risk they can tolerate.

Investment strategies vary greatly. There isn't a one-size-fits-all approach to investing, which means there isn't one particular plan that works for everyone. This also means that people need to reevaluate and realign their strategies as they get older in order to adapt their portfolios to their situation. Investors can choose from value investing to growth investing and conservative to more risky approaches.

As mentioned above, people can choose to make their investment decisions on their own or by using a financial professional. More experienced investors are able to make decisions and investment choices on their own. Keep in mind that there is no right way to manage a portfolio, but investors should behave rationally by doing their own research using facts and data to back up decisions by attempting to reduce risk and maintain sufficient liquidity.

Because investment strategies depend so heavily on your personal situation and goals, it's important for you to do your research before you commit your capital to any investment.

Special Considerations

Risk is a huge component of an investment strategy. Some individuals have a high tolerance for risk while other investors are risk-averse. Here are a few common risk-related rules:

  • Investors should only risk what they can afford to lose
  • Riskier investments carry the potential for higher returns
  • Investments that guarantee the preservation of capital also guarantee a minimal return

For example, U.S. Treasury bonds, bills, and certificates of deposit (CDs) are considered safe because they are backed by the credit of the United States. However, these investments provide a low return on investment. Once the cost of inflation and taxes have been included in the return on income equation, there may be little growth in the investment.

Along with risk, investors should also consider changing their investment strategies over time. For instance, a young investor saving for retirement may want to alter their investment strategy when they get older, shifting their choices from riskier investments to safer options.

Types of Investment Strategies

Investment strategies range from conservative plans to highly aggressive ones. Conservative investment plans employ safe investments that come with low risks and provide stable returns. Highly aggressive ones are those that involve risky investments, such as stocks, options, and junk bonds, with the goal of generating maximum returns.

People who have a greater investment horizon tend to employ aggressive plans because they have a longer timeline while those who want to preserve capital are more likely to take a conservative approach.

Many investors buy low-cost, diversified index funds, use dollar-cost averaging, and reinvest dividends. Dollar-cost averaging is an investment strategy where a fixed dollar amount of stocks or a particular investment are acquired on a regular schedule regardless of the cost or share price. Some experienced investors, though, select individual stocks and build a portfolio based on individual firm analysis with predictions on share price movements.

Value Investing vs. Growth Investing

Some investors may choose strategies such as value and growth investing. With value investing, an investor chooses stocks that look as they though trade for less than their intrinsic value. This means that these stocks that the market is underestimating. Growth investing, on the other hand, involves investing capital in the stocks of junior companies that have the potential for earnings growth.

Example of Investment Strategy

A 25-year-old who starts off their career and begins saving for retirement may consider riskier investments because they have more time to invest and are more tolerant to risk They can also afford to lose some money in the event that the market takes a dive because they still have time earn more money. This means they can invest in things like stocks and real estate.

A 45-year-old, on the other hand, doesn't have a lot of time to put money away for retirement and would be better off with a conservative plan. They may consider investing in things like bonds, government securities, and other safe bets.

Meanwhile, someone saving for a vacation or home won't have the same strategy as someone saving for retirement. They may be better off putting their money away in a savings account or a CD for short-term goals like these.