What Is an Investment Strategy?
The term investment strategy is a style of investment that is governed by a set of rules and procedures created to guide investors for designing their investment portfolio.Investment strategies guide investors' decision based on their objectives and risk profile. Some investment strategies are designed to offer excellent returns with high-risk, while some investment strategies concentrate on protection.
Strategies aren't static, which means they need to be reviewed periodically as circumstances change.
Understanding Strategies
Investment strategies are styles of investing that help individuals meet their short- and long-term goals. Strategies depend on diferent factors, including:
Age
Goals
Lifestyles
Financial situations
Available capital
Personal situations (family, living situation)
Expected return
Investment strategies vary greatly. There isn't a one-size-fits-all approach to investing, which means there isn't one particular plan that works for everyone. This also means that people need to reevaluate and realign their strategies as they get older in order to adapt their portfolios to their situation.
Types of Investment Strategies
Investment strategies range from conservative plans to highly aggressive ones. Conservative investment plans employ safe investments that come with low risks and provide stable returns. Highly aggressive ones are those that involve risky investments.
1. Short-Term Investment Strategies
A short-term investment strategy is generally one that provides results before the three-year mark. A few examples of this type of investment strategy are wholesaling, high-interest savings accounts, short-term bonds, and cash management accounts. Investors typically gravitate towards short-term projects if they are saving for an upcoming event (such as a wedding) or if they are interested in earning capital fast to invest in something else. The biggest factor to consider when looking at short-term options is profitability. With a three-year turnaround, many investments simply don’t have the time to generate the same results as longer investments.
2. Long-Term Investment Strategies
Long-term investment strategies are usually what comes to mind when thinking about investing. These include rental real estate, stocks, mutual funds, and gold or collectibles. Long-term investments can generate returns over several years, or in some cases as long as an investor chooses to stay involved in the market. Long-term investment strategies can be a great option as they often involve lower risk and higher returns when compared to other investments. That being said, investors will have to get used to their capital being locked up for long periods of time with this type of investment strategy.
3. Active Investment Strategies
An active investment strategy is exactly what it sounds like: one where the investor is regularly involved. Arguably, the well-known active investment strategy is flipping houses (thanks to popular TV shows on HGTV). Another form of active investing is when investors control their own stock portfolios, rather than working with a financial institution or advisor. Active investment strategies can be great for anyone who wants to be hands-on with their finances, whether that be through portfolio management or getting involved directly in real estate.
4. Passive Investment Strategies
Passive investment strategies allow investors to sit back while their assets generate profits. These options include REITs, rental properties (typically with a property management company), or index funds. While passive investment strategies do require the same amount of research to establish, they don’t require day-to-day involvement compared to other investments. For this reason, many choose this type of investment strategy as a way to supplement their regular income or save for retirement.
5. High-Risk Investment Strategies
Risk is quite the buzzword when evaluating different investment strategies, and it refers to the volatility of a given investment. Most people associate high risk with high reward or profits. In many cases, this can be true, but high-risk investment strategies are not for everyone. More often than not young investors, who would have time to financially recover if anything were to go wrong, will gravitate towards these strategies. A few examples of high-risk investment strategies include investing in startup companies or “playing” the stock market so to speak.
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