Investing can seem like a very complex and fast-moving process. But we make it simple for you to understand. With endless combinations of investment vehicles to choose from, it can be difficult to make well-informed decisions, even with all the available knowledge. Each approach is unique. There is nothing right or wrong about any approach and it should be based on the client's personal financial goals and philosophy.
PASSIVE VS. ACTIVE
The passive strategy involves buying and holding stocks and not frequently deals in them to avoid higher transaction costs. They believe they cannot outperform the market due to its volatility, hence passive strategies tend to be less risky. On the other hand, active strategies involve frequent buying and selling. They believe they can outperform the market and can gain more returns than an average investor would.
GROWTH INVESTING (SHORT-TERM VS. LONG TERM)
Investors chose the holding period based on the value they want to create in their portfolio. If investors believe that a company will grow in the coming years and the intrinsic value of a stock will go up, they will invest in such companies to build their corpus value. This is also known as growth investing. On the other hand, if investors believe that a company will deliver good value in a year or two, they will go for short term holding. The holding period also depends upon the preference of investors. For example, how soon they want money to say to buy a house, school education of kids, retirement plans, etc.
Value investing strategy involves investing in the company by looking at its intrinsic value because such companies are undervalued by the stock market. The idea behind investing in such companies is that when the market goes for correction, it will correct the value for such undervalued companies and the price will then shoot up leaving investors with high returns when they sell. This strategy is used by the very famous Warren Buffet.
This type of strategy focuses on generating cash income from stocks rather than investing in stocks that only increase the value of your portfolio. There are two types of cash income which an investor can earn – (1) Dividend and (2) Fixed interest income from bonds. Investors who are looking for steady income from investments opt for such a strategy.
DIVIDEND GROWTH INVESTING
In this type of investment strategy, the investor looks out for companies that consistently paid a dividend every year. Companies that have a track record of paying dividends consistently are stable and less volatile compared to other companies and aim to increase their dividend payout every year. The investors reinvest such dividends and benefit from compounding over the long term.
This types of strategy allow investors to buy stocks of companies at the time of the down market. This strategy focusses on buying at low and selling at high. The downtime in the stock market is usually at the time of recession, wartime, calamity, etc. However, investors shouldn’t just buy stocks of any company during downtime. They should look out for companies that have the capacity to build up value and have a branding that prevents access to their competition.
This type of investment strategy allows investors to invest a small portion of stocks in a market index. These can be S&P 500, mutual funds, exchange-traded funds.
In this investment strategy, investors will allocate portions of their portfolio to different investment styles depending on their time horizon and risk tolerance. For example, investors can chose income investing strategy along with a capital growth goal.
MODEL PORTFOLIO EXAMPLES
Source: Schwab Center for Financial Research with data provided by Morningstar, Inc. The return figures for 1970-2017 are the compounded annual average and the minimum and maximum annual total returns of hypothetical asset allocation plans.