What is an investment strategy, and how does it work?
Find out what an investment strategy is and how it can help you grow your wealth according to your goals and risk tolerance.
Summary
Investment strategies create a clear plan of action for investors to follow.
Risk tolerance, personal factors, financial situation and future goals all impact investment strategies.
Different strategies apply to short and long-term investments.
Aligning investment strategies with personal goals is easier with a financial advisor.
What is an investment strategy?
An investment strategy is a well-thought-out financial plan that helps individual investors grow their wealth in a way that aligns with their unique goals and risk appetite. There is a wide range of different types of investment strategies, each of which takes a different approach to wealth generation over time.
There are multiple factors that you should consider before you adopt an investment strategy. Risk tolerance, level of experience, and overall goals must be considered, as well as some basic personal factors such as:
Age
Current financial position
Income
Debt
Personal situations
Future plans and commitments
A strong investment strategy should be both ambitious and practical. In order to find out where each investor’s balance lies, an understanding of accessibility and realistic potential must be taken into account.
How do investment strategies work?
Investment strategies work by providing investors with a plan of action that they can follow for both short and long-term investments.
An investment plan is based on solid research, expertise, facts, and statistics, and it helps investors make knowledgeable, data-driven decisions rather than acting impulsively or without guidance. This increases the likelihood of higher returns and greater profits over time.
Why would you make an investment strategy?
Investing can be very rewarding when a cautious and tactical approach is implemented, and creating a plan can offer great benefits.
Not only does making and sticking to an investment strategy improve investors' returns, but it also speeds up the decision-making process when tough calls need to be made. Strategies have structure, and structure is advantageous when you’re trying to achieve a specific financial goal.
What are the different types of investment strategies?
There are multiple different types of investment strategies that people can use when considering investing. Some of the most popular investment strategies include the following:
Growth investing
Growth investing involves investing in companies expected to see above-average market growth rates on a long-term basis. It focuses on the premise that whatever you’re invested in is about to experience significant, sustained growth.
Growth investing can be applied to investing in any company or entity, typically in technology, recovery shares, emerging markets, and internet stock.
Buy and hold
Buy-and-hold investments entail making an investment and holding onto it for an extended period of time so that it can reach its peak value return.
Quality investing
A quality investing strategy is based on the idea of only investing in companies or securities that have a unique reputation for exceptional characteristics relating to product quality, credibility, or management success. A great quality investment strategy prioritizes both stability and growth potential.
Value investing
Value investing is all about the market’s extreme responses to fluctuating stocks or securities. Instead of focusing on credibility or growth prediction, value investing involves simply buying stock when its value is low and re-selling when its value is high, regardless of the company's repertoire.
What are the pros and cons of strategies for investing?
Investing has pros and cons, and creating a productive investment strategy can be challenging.
Pros:
Enhances diversification: The more strategies you use and understand, the easier it becomes to diversify your portfolio and increase your returns.
Attracts more money: The more strategic and experienced you are as an investor, the easier it can be to attract profitable investment opportunities and gain the trust of other investors.
Expedites decision-making: Investment strategies provide a clear path to follow when faced with difficult choices.
Guidance for new investors: If you are new to the world of investing, having a strategy can help you feel more confident and supported in your decisions.
Cons:
Rigidity: If you follow an investment strategy too closely, it can result in rigidity that costs you certain profitable opportunities.
Limited growth potential: Not all investment strategies are conducive to growth.
Uncertainty about the right strategy: Lack of experience can make it difficult to choose the right strategy, causing confusion.
Requires research: Identifying the right strategy for your means and level of experience is crucial, and if you are new to investing, comprehensive research will be needed.
5 investment strategy tips to help you invest successfully
Investment strategies may be extremely diverse, but there are some tips for success that can be applied to just about all of them.
Here are five of the best investment strategy tips today:
Experiment with diversification
It can take trial and error to find out which investment strategy works best for you. It’s a good idea to experiment with a few different ones over time. This can also boost portfolio diversity.
Talk to other investors about their strategy choices
Investment strategies have a lot to do with personal style and temperament. For instance, more aggressive or spontaneous investors will be drawn to high-risk, high-reward strategies like value investing or quality investing. Other, more conservative individuals may gravitate toward more predictable or stable strategies such as growth or buy and hold investments. By networking with other investors, you can not only learn valuable insights but can also discover more about which strategy might best suit your personality.
Learn about risk tolerance
Risk tolerance is one of the most important factors to consider when choosing an investment strategy. Educate yourself on what risk is and how much you can tolerate from an investment perspective.
Leverage your outcome with a financial advisor
Investors who have access to professional financial advice are more likely to reach their investment goals. Financial advisors provide guidance, support, and expert advice when faced with investment-related challenges and opportunities.
Establish personal goals first
Before diving into a new investment strategy, make sure you understand exactly what your personal motives and goals are. This will help you make the best decision possible with your hard-earned funds.
Should I create a diversified portfolio as part of my investment strategy?
Diversifying your portfolio is a common strategy to spread risk by investing in a variety of asset classes, such as stocks, bonds, and real estate. Doing so minimizes the impact of individual asset performance. Your real estate investment strategies will also differ from your stocks and bonds strategies, allowing for reduced risk.
How can I align my investment strategy with my financial goals?
You should tailor your investment strategy to your specific financial objectives. You need to include any short or long-term investments, such as saving for retirement, making a major purchase, or generating income.
What role does asset allocation play in my investment strategy?
Asset allocation involves deciding how to distribute your investments among different asset classes. It is a critical component of your investment strategy as it helps you balance risks and rewards in a way that suits your needs.
Are there tax considerations for my investment strategy?
Taxes can impact the returns on your investments. Short- and long-term investments have different tax implications, and these may differ from state to state and at the government and federal levels. Consider tax-efficient strategies, such as tax-advantaged accounts, when drawing up your investment plan.
How often should I review and adjust my investment strategy?
It’s a good idea to review your investment strategy regularly. Typically, you should review your strategy at least once a year. However, you should also do a review whenever there are significant changes in your financial situation or investment goals.
The bottom line
Investment strategies are one of the most important tools for maximizing your returns. Providing foresight, structure, and the ability to transform your resources and financial ambitions into actionable steps, choosing a strong investment strategy can be the key to unlocking long-term wealth generation success.
If you need help creating an investment strategy that aligns with your goals, you need to get matched with a financial advisor. Simply answer a few questions, and Unbiased will match you with an SEC-regulated financial advisor best suited to your needs.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.