5 Basic Strategies to Know Before You Start Investing
October 26, 2021
When it comes to investing strategies, the best ones might not always be the ones that have the highest historical returns.
In fact, the best ones have to be those that work for your objectives, risk tolerance, and cash flow restrictions.
As I’ve written before, there’s no one-size-fits-all investment strategy for any single individual. The best investment strategies are the ones that work best for you.
Having said that, there are some time-tested basic investment strategies that could prove useful for you.
Here are five basic investing strategies that I think every investor should be aware of.
1) Growth investing
Growth investing using fundamental analysis is one of the most conventional investment strategies. This is an active investing strategy and it involves analysing companies’ business models and financial performance.
Most research analysts in the market adopt some of these analyses to search for companies that show promising prospects and potential for strong earnings growth in the years ahead.
In our market today, most tech-related stocks are deemed as growth stocks but investors need to understand the core business of these different companies, their strategies and competitive strengths (as well as the management styles) of these high-flying stocks.
While growth is vital, it is important to note that this strategy involves a lot of analytics based on certain assumptions that have been computed in order to arrive at a valuation of the growth stock.
It is worth remembering that back in the late 1990s during the dot-com bubble era, countless Internet-related companies were riding an enormous wave of enthusiasm of the growth potential that pushed their stock valuations into stratosphere.
In short, the “growth at any price” strategy is something that investors should keep in mind, in order to keep their enthusiasm over a certain company, in check.
I, for one believe that “growth at a reasonable price” would be a good point to start when one analyses the various companies in the stock market.
2) Value investing
Value investing is another popular strategy that seasonal investors would have heard of.
In simple terms, if you’re a value investor, you’re looking for stocks that are selling at a “discount” to their intrinsic, or true value. In short, you’re looking for a bargain.
Here are some of the general characteristics of value stocks:
- They are typically involved in mature businesses
- Their share prices are usually quite stable
- Their earnings (revenue and profit) are relatively steady and consistent
- They usually pay dividends
Personally, I’m a believer in value investing and with the expected tightening of the monetary policy, we might see some shift from growth stocks to value stocks.
If you’re busy, an easy exposure into value stocks would be to buy into index funds, exchange-traded funds (ETFs) or actively-managed funds that hold value stocks.
3) Dollar Cost Averaging
One of the worst things that could happen when investing is to allow our emotions to control our decisions.
My colleague, Tim Phillips, has talked about dollar cost averaging in his article here. When you dollar cost average, you invest an equal amounts in a security at a regular intervals rather than trying to time the best entry into the market.
Personally, this is one of the most stress-free investment strategies as it reduces investors’ anxiety – especially when the market is volatile.
The downside risk to dollar cost averaging is that your return might lag in comparison to the market or your peers during a bullish run.
Another problem with dollar cost averaging is the cyclical nature of the economy. This is especially true if you’re buying into a cyclical business, which might experience a certain period of strong growth before tapering down and remaining stagnant until the next economic cycle.
A long-term investor might not be too troubled by the change in the business cycle as he or she looks beyond a single business cycle of growth.
4) Income investing
The income investing strategy focuses on investments that could generate cash income on a recurring period.
Generally, the two ways to achieve this is through dividends from stocks or fixed interest income from bonds.
Investors who are looking for steady income would opt for such a strategy.
The good thing about income investing is that the overall portfolio return should be more stable and it offers some visibility in terms of your cash flow.
Of course, the safer option means that the return is likely to underperform against investment strategies that take on more risk.
5) Contrarian investing
Investors who take on the contrarian view are those who believe that “fortune favours the bold”.
However, with the much higher risk, this investment strategy is more suitable for someone who has a high tolerance level for risk.
This type of strategy would see investors buy into companies during the downturn. It focuses on buying stocks at low and selling at high.
However, merely buying stocks that are on a downtrend is not what contrarian is all about.
A contrarian strategy focuses on the mispricing of the market amid the noise that drives the market to an extreme low or high level.
There is often the misconception that the contrarian strategy is merely taking the other side of the view from conventional wisdom.
Rather, a contrarian seeks opportunities to buy or sell specific investments when there is a mispricing and euphoria that drives majority of the market to be doing the opposite.
For example, during the COVID-19 pandemic, there was an initial slump in the market but the contrarian took advantage to buy into companies that could benefit from the restrictions imposed globally.
The upshot is that the return could be significant and investors who take on the contrarian strategy (and get it right) will most likely outperform the market.
It is, however, a risky strategy because even if the contrarian might be right in their views on the mispricing, their timing might not be accurate and the correction of these mispricings might only realised at a later date.
The risk with the contrarian strategy is high and might not be suitable for most investors.
Have a game plan
As I’ve mentioned earlier, different investment strategies fits into our profile differently.
What’s more important is to have a game plan, a strategy that can help increase your chances of success in investing.
There’s always that tendency to look at the latest hot investment trend that you found on the internet and try to follow it.
As an advocator for investing, I believe it’s great to learn about the latest investment styles and strategies but just like clothing, you need to find one that fits you.
Do your homework, understand your risk profile, and have a game plan.
Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.