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Highlights
A plan designed to help individual investors achieve their short and long-term financial and investment goals, an investment strategy outlines the style of investing you should undertake depending on your personal circumstances, as well as factors, such as your age, lifestyle, capital available, risk tolerance and expected returns.
Having a solid investment strategy is essential to your financial success. For one, it can guide an investor to select the right assets for their portfolio, while it can instil a sense of long-term thinking and keep at bay financial decisions based on emotions which can ultimately cause harm and stir you away from your goals.
Varying to a great extent and with each strategy having its own pros and cons, here we delve deeper into the most common investing strategies you might want to consider.
Growth investing is all about buying assets that have the potential to increase in value over time. This means that rather than looking to make a regular income from your investments, the aim is to achieve long-term growth. One of the oldest and most basic forms of investing styles, growth investors will typically invest in growth companies, that is, young or small companies whose earnings are expected to increase at an above-average rate compared to their industry sector or overall market. Other companies that may be considered as such are blue-chip firms and those that operate in emerging markets.
An example of a growth stock could be Amazon (AMZN). As of the first quarter of 2021, Amazon ranks in the top three U.S. stocks by market capitalisation, while it remains one of the largest companies in the world. Its stock has historically traded at a high P/E ratio, so much so that between 2019 and early 2020, its P/E has remained upwards of 70.
Growth investing works by evaluating a company’s current financial health, as well as its potential to grow. Features such as a solid history of earnings growth, expanding revenues and profit margins and even a long run of analyst earning upgrades are all important. And naturally, in order for a company to grow, there should be a robust appetite for its products or services.
But you may also want to consider the prospects of the industry in which the company operates. For instance, if you would like to invest in Tesla (TSLA), you may want to look into the future of electric vehicles or if you are interested to invest in a tech company that is heavily involved in Artificial Intelligence (AI), you may want to analyse the technology’s potential of it becoming a fixture of everyday living before investing.
Seeing that growth investing seeks to find highly successful companies, the strategy offers the perfect opportunity to capitalise on their momentum, while the sustained increases in the stock prices can potentially lead to wealth accumulation. With growth companies being on the cusp of success, you could spot a diamond in the rough and ride with them to the top.
One drawback is that some companies which are in growth mode do not pay any dividends since capital is often used to sustain their expansion. On the other hand, with faster earnings growth comes higher valuations and this could be riskier for some investors, most especially if sentiment towards these companies sours.
A good starting point particularly for investing novices, with a fund your money and that of other investors is pooled together, while a professional fund manager will pick and choose assets on your behalf. Funds usually have a wide spread of investments which helps to achieve diversification which in turn, can minimise your exposure to risk. In addition, with such a wide variety of funds available each with its own objective, you can opt to invest in local blue-chip companies or global ones.
Another alternative is to invest in individual growth stocks. Technology companies are usually considered good growth stocks since they are typically valued high, while they have the potential to grow beyond these valuations when the environment is right. Financial statements are used to compare past and present data of a specific business against that of others within the industry which can help determine whether the stock is a good purchase.
While growth investors opt for up-and-coming companies that are on a growth trajectory, value investors seek out bargains other investors may have missed. These could be companies that are trading at a discount to their true value because they are unpopular or undervalued. Value investors typically believe that the market overreacts to either good or bad news, which results in stock price movements that may not necessarily correspond with a company’s long-term fundamentals. As a result, this overreaction offers an opportunity to profit by buying stocks at discounted prices. A company’s intrinsic value is determined after conducting fundamental analysis of a company.
A good example of value investing is when seeking to profit from market overreactions. For example, when in May of 2016 Fitbit released its earnings report, its stock saw a sharp decline in after-hours trading. The company had met analysts’ expectations for the quarter, while it had also increased its guidance for the year. But although the company looked strong and growing, it had invested heavily on research and development and as a result, its EPS (Earnings per Share) had declined. This was seen by many regular investors as the right opportunity to sell off shares which caused its price to decline. In contrast, value investors looked at Fitbits’ fundamentals and understood that it is merely an undervalued security.
One way of putting value investing to work for you is to pick the appropriate assets – those that are cheap or undervalued. If you cannot perform exhaustive research of the company’s fundamentals, then you may want to look at the P/E ratio. A single number that comes from dividing a stock’s share price by its EPS, a lower P/E ratio means that you are paying less per $1 of current earnings, so naturally, you should seek companies with a low ratio. Although this metric is a good tool for value investing, considering this figure alone is never enough, so seek professional help when needed.
Investing in securities that are currently underpriced on the stock exchange can help to churn higher returns in the future. Another important advantage is that the strategy can identify securities that have potential, so you can get good stocks at lower rates. But in order for value investing to work, you must invest for the long term. Often, investors give up on the strategy after a few poor-performing years, but pulling your money out and running too quickly will not offer much in return.
While the rewards of the strategy are appealing, the process of buying low and selling high is easier said than done. You must also keep in mind that it can take years for a value stock to maximize its intrinsic value and there is no guarantee that it will reach its full potential. Also, a company’s share price could be low for other reasons. For instance, it may be an indication that the firm is going through financial difficulties or it is losing market share to a competitor.
These offer the perfect opportunity to own a basket of undervalued stocks, so instead of spending the time to search for value stocks and analyse each company’s financial statements, a fund manager can buy index funds or actively managed funds that hold value stocks. Often the Russell 1000 Value Index is a popular benchmark for value investors and several mutual funds mimic this index.
An excellent way of building wealth over time, income investing involves buying securities that pay out returns, typically on a steady schedule and which could be in the form of dividends, bond yields or interest payments. Considered a relatively low-risk strategy, centred on locking in income as opposed to depending too much on capital gains, ideally your portfolio should include assets whereby the total dividend received should rise above the rate of inflation, protecting in this manner the income stream’s purchasing power.
If done right, this strategy can help you build a fast-growing nest egg or even supplement your household earnings. A key to achieve this is to ensure that your portfolio is diversified, by selecting 15 to 20 high-yield securities from a wide variety of industries, while you should hold these for as long as possible.
An example of income investing would be a portfolio that includes shares in a specific company and bonds issued by another company. If your shares pay Eur1,000 in dividends every six months and your bonds issue Eur 250 in coupon payments quarterly, together they would generate Eur 3,000 of income annually.
Perhaps one of the most important advantages of income investing is the fact that it can supplement your monthly or annual income. However, income investing also offers the potential for capital stock growth particularly in the long-term, which can contribute towards your wealth in the years to come.
Although the strategy’s purpose is to maximise income with the lowest possible risk, the income it generates is not always guaranteed since in some cases the investment could potentially fall through, leading to a loss of income as opposed to income generation.
Dividend stocks are companies that pay out a portion of their earnings to a class of shareholders on a regular basis. Usually well established, these companies boast stable earnings and a long track record of distributing dividends. Dividends may be paid out in the form of cash or as additional stock, with most dividends paid out on a quarterly basis, although others may be paid out monthly, annually or even once in the form of a special dividend.
Considered a safe means of investing and a good way of generating income, government bonds have diverse maturities, while they are usually regarded as less risky, unless political or economic risks are in place. Once the bond matures, the investor gets back the initial investment together with any added interest along the way.
Businesses often issue bonds as opposed to seeking bank loans since these offer more favourable terms and possibly lower interest rates given the current yielding scenario. Similar to government bonds, corporate bonds are considered riskier and for this reason they tend to provide higher bond yields than government bonds. The risk and return of these bonds depend to a great extent on how credit-worthy the company is.
Have a look at the benefits of bonds and how they work.
An open-ended and professionally managed investment, funds pool money from many investors to purchase securities. Typically, they are an important component of income-investing portfolios since they can generate a periodic inflow of income either in the form of dividends or interest payments.
Have a look at some further ideas of how fixed income securities offer a steady return.
Aimed at purchasing securities that have been showing an upward price trend, momentum investors look to profit from either buying or selling short securities when they are trending at their utmost, while they tend to favour this strategy since they believe that once a trend is well-established, then it will most likely continue being so.
By making use of a strictly data-driven approach, momentum investing looks for patterns in stock prices to guide purchasing decisions and to gauge the strength of the trend, in other words, to determine the level of price momentum in the market. At the same time, they seek to analyse and if possible, anticipate the behaviour of other investors in the market, which is why having an awareness of behavioural biases and investor emotions is important to boost the effectiveness of this strategy.
A real-life example of momentum investing would be as follows. A financial advisor uses various technical indicators like moving averages, as well as specific momentum indicators like the Average Direction Index (ADX) to identify the existence of a specific trend. Once the trend gains momentum and strengthens, the advisor takes a market position in the direction of the trend by either buying an uptrend or selling a downtrend. When the momentum of the trend shows signs of slowing down, the advisor looks to exit the position, hopefully at a profit, before there is an actual trend reversal.
As a highly technical strategy, momentum investors must spend a significant amount of time trying to determine the strength of trends in asset prices, while possessing knowledge of key technical indicators is crucial for executing this strategy successfully.
Below are just some of the technical indicators used in momentum investing.
Moving averages: these enable investors to identify prevailing trends whilst eliminating small and insignificant price fluctuations. Usually, when a security’s price remains either consistently at or above a moving average, then this could be an indication of an uptrend.
Trend lines: a basic technical analysis tool for monitoring price movements, a trend line is drawn between two successive points on a price chart. A sloping upward line is a reflection of a positive trend.
The Average Directional Index (ADX): a popular momentum indicator, the ADX is often used to determine the existence of a trend, as well as its strength by calculating the expansion or contraction of a security’s price range over a specified period of time. Any reading above 25 shows a trend.
One of the main advantages of momentum investing is that it can be profitable in a relatively short period of time if executed correctly when compared to other investment strategies where the focus is on a buying-and-holding approach. In addition, seeing that the strategy relies on technical analysis of charts as opposed to analysing the fundamental factors that go into each investment, momentum investing can be considered a somewhat simpler strategy. Having said that, it’s important to note that predicting price movements has its flaws and can lead to mistakes.
One of the riskiest investment strategies since it requires you to make inferences about future price movements, the strategy could be effective, however, the opposite is also true. Various events and developments can easily throw these inferences off balance.
In addition, there is also an unlimited downside risk if you short sell. For instance, if you borrow 50 shares and sell them for $100, but the stock price does not drop and instead it goes up, these 50 shares could be worth $150, $200 or more. Sooner or later the short seller must repurchase the shares to return them to the lender. If the share price keeps increasing, doing so will be an expensive proposition.
Some exchange-traded funds (ETFs) apply momentum investing techniques which allow investors to add momentum investing exposure to their portfolio. In turn, these shares give investors access to a basket of stocks which are considered to be characteristic of momentum securities.
Each boasting its merits and shortcomings, these strategies require time to understand their characteristics and adequate preparation before executing them. For this reason, it is always advisable to seek professional help. Qualified and boasting a wealth of experience, Calamatta Cuschieri’s financial advisors can address clients’ unique needs and help you select the ideal investment strategy. At the same time, they have access to a full range of investment products, which means that they can directly invest in the markets.
Offering you peace of mind, an experienced professional will be taking care of a wide range of challenges on your behalf, keep close tabs on the markets and conduct thorough research to identify the best investment opportunities. Get in touch with us today.
Disclaimer
The information provided on this website is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Similarly, any views or opinions expressed on this website are not intended and should not be construed as being investment, tax or legal advice or recommendations. Investment advice should always be based on the particular circumstances of the person to whom it is directed, which circumstances have not been taken into consideration by the persons expressing the views or opinions appearing on this website. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views, or opinions appearing on this website. You should always take professional investment advice in connection with, or independently research and verify, any information that you find or views or opinions which you read on our website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. CC does not accept liability for losses suffered by persons as a result of information, views, or opinions appearing on this website.
Calamatta Cuschieri Investment Services Ltd is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act.
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