The investment strategies are the plans or actions that investors follow to achieve their financial objectives, taking into account their risk profile, time horizon and level of knowledge.
What are investment strategies and what are they for?
Investment strategies are the set of criteria, rules and techniques that investors apply to select, buy, sell and manage their financial assets, such as stocks, bonds, funds, etc.
Investment strategies serve to:
- Define the objectives of the investment, such as obtaining a certain return, generating passive income, preserving capital, etc.
- Determine the level of risk one is willing to assume, depending on the tolerance, capacity and risk aversion of each investor.
- Establish the term of the investment, which may be short, medium or long term, depending on how long the investment is to be maintained.
- Choosing the financial assets to be invested, according to the type of return, degree of liquidity, diversification, etc.
- Apply analysis methods, which may be fundamental, technical, quantitative, etc., to assess the value and potential of financial assets.
- Follow management principles, which can be control, monitoring, review, etc., to optimize the return and risk of the investment.
What types of investment strategies are there?
They can be classified according to different criteria, such as type of return, degree of intervention, investment style, etc.
The following are some of the most common types:
According to the type of profitability
A distinction can be made between fixed income and equity investment strategies.
Fixed-income fixed income investment are those that seek to obtain a predetermined and constant return, regardless of market behavior. Some examples are bonds, bills, deposits, etc.
Equity investment equity investment strategies are those that seek to obtain a variable return dependent on market behavior. Some examples are stocks, funds, ETFs, etc.
According to the degree of intervention
A distinction can be made between active and passive investment strategies.
The active investment strategies are those that involve a continuous selection and management of financial assets, with the objective of outperforming the market or a benchmark index. Examples are value investing and growth investing, tradingetc.
The passive investment strategies are those that involve replicating or tracking a market or benchmark index, without attempting to outperform or anticipate its movements. Examples are index funds, ETFs, robo-advisors, etc.
According to investment style
A distinction can be made between top-down and bottom-up investment strategies.
Top-down investment strategies are those that start from a macroeconomic and sectoral analysis and then select the most appropriate financial assets. Some examples are thematic investment, geographic investment, investment by sector, etc.
Bottom-up investment strategies are those that start from a microeconomic and financial analysis and then select the most attractive financial assets. Examples include value investing, growth investing, dividend investing, etc.
What other investment strategies are there?
In addition to the investment strategies we have seen, there are others that are also very interesting and can complement or diversify your portfolio.
These strategies are:
Investment in indexes
It is a passive investment strategy that consists of replicating the behavior of a stock market index, such as the S&P 500, the IPC, the IBEX 35, etc.
This strategy has the advantage of low cost, high diversification and high transparency, but also the disadvantage of lower potential returns, higher systemic risk and less flexibility.
Financial products such as index funds or ETFs can be used for implementation.
Thematic investment
It is an active investment strategy that consists of choosing and buying shares of companies that are dedicated to a specific sector, industry, trend or issue, such as technology, health, environment, education, etc.
This strategy has the advantage of higher potential returns, lower market exposure and greater customization, but also the disadvantage of higher cost, less diversification and less transparency.
Financial products such as thematic funds or thematic ETFs can be used for implementation.
How to choose the most suitable investment strategy for you?
In order to choose the most suitable investment strategy for you, you should take into account several aspects, such as the following:
- Define your investor profileYou should know your income level, your objectives, your time horizon, your risk tolerance and your preferences. This will help you choose the strategy that best suits you, whether it is fixed income, equity, active, passive, top-down, bottom-up, etc.
- Search for information on available strategiesYou can consult websites, blogs, podcasts, books or investment courses to learn more about the different strategies, their advantages, disadvantages, requirements, results, etc.
- Compare strategies with each otherYou can use tools such as simulators, calculators, graphs or tables to compare strategies with each other in terms of profitability, risk, cost, diversification, etc.
- Choose the strategy that suits youOnce you have defined, researched and compared strategies, you must choose the one that suits you best, depending on your profile, your objectives, your time frame and your level of risk. You must be coherent, consistent and disciplined with your choice, and not let yourself be carried away by emotions, fashions or other people’s opinions.
