Investing Strategies

Investing strategies are crucial for being a successful investor. They put you in the best position to achieve your investing goal. A successful investor will formulate an investing strategy before they invest in any shares.  

Having a strategy provides the investor with a framework to follow when making all their future investing decisions. The framework should be checked each time before an investing decision is made. Whether that is to sell, buy or hold. 

Why do we need a strategy?

Anyone investing should have a strategy, however the level of complexity of the strategy can vary greatly. The strategy is tailored for the individual and is your “accountability check”. It will keep you honestly on track for your investing goal.

If your strategy is to be a passive investor, and all of a sudden you find yourself trading Bitcoin, then you aren’t following your strategy.

Accountability is not the only reason why investors should set investing strategies. Another reason is that it essentially provides a plan or framework for your investing.  Clearly defining a framework makes it a lot easier to follow and achieve your goals rather than just winging it.

Types of Strategies:

  • Passive
  • Active
  • Managed

Passive Investing Strategy:

A Passive investing strategy is often extremely underrated as it doesn’t seem as glamorous.  A passive investing strategy is built off long-term wealth building. It requires the investor to buy and hold an investment for a long period of time, while potentially adding more shares over time and not selling. 

Passive investing is also known as buy and hold investing, utilising time and compounding as the main wealth building mechanism.  This is very different to someone that might day trade, making multiple trades in 1 day.

A passive investing strategy is reliant on the belief that the investment will continue to increase in value over time. Holding for a long period of time it reduces the amount of market timing risk, which often catches investors out.

A common passive investing strategy is to invest in a low cost index fund or ETF that tracks the Standard & Poor 500 (S&P 500), such as the Vanguard S&P 500 ETF (VOO). This is a strong strategy as since its inception in the 1920’s the S&P 500 has returned an annualised 10%. 

The S&P 500 is often referred to as “the market”, which is the benchmark for people to gauge their strategy’s performance against.  Worst case if they did nothing else but invest in “the market”, that’s the return they could achieve.

92% of professional fund managers failed to beat “the market” over a 15 year period.  These are extremely well educated full time professionals in the industry and they can’t do it.  So it adds serious strength to the passive income strategy, not only does it free your time up to do other things you enjoy, but you will most likely get better returns than paying a professional.

Types of Passive Strategies:

  • Index Funds (Low cost Index or ETF that tracks S&P 500)
  • Dollar Cost Averaging (Investing the same amount at the same time interval, over the long term)
  • DRIP (Dividend Reinvestment Plans- Using received dividends to purchase more of the same shares)
  • Buying and Holding Cryptocurrency and collecting interest on your assets

Investing Strategies

Active Investing Strategy:

Active investing is where the investor is actively watching and picking the companies they wish to invest in. This includes people that trade over long-periods of time, but also short periods of time too.  The main difference here is that active investing is the specific selection of companies to invest in.  Whereas, passively investing in an S&P 500 index fund means you have a group of 500 companies working for you.

The allure of active investing is that you have the opportunity to pick a company like Amazon or Apple before they become “Amazon and Apple”.  This provides the potential for huge gains, but conversely you could also pick Enron!

For example, Monster Beverage Corp (MNST) has returned 87,560% over the last 20 years, whereas Enron went bankrupt.

There are multiple different methods for valuing stocks and figuring out your selection, this comes with experience and diligent research. Active investing requires a lot of time to be done successfully, especially for a long period of time.

There are different types of active investing strategies and each requires a different skillset.  It is possible to be proficient across all strategies, it just requires a lot of self-education and building up your own experience.

Types of Active Investing Strategies:

  • Fundamental Analysis (Researching business fundamentals like revenue, debt, cash flow etc..)
  • Technical Analysis (Using technical charts to read investor sentiment and predict moves from patterns)
  • Growth Investing (Selecting companies that will disrupt industries and have huge revenue growth accordingly, think Tesla)
  • Value Investing (Selecting extremely successful companies that are trading under their fair value and present a great buying opportunity)
  • Dividend Investing (Purchasing a strong company for the quarterly dividend payments you can receive)
  • Day Trading (Looking for extremely short term trades with high volatility/opportunity to make profit)

Managed Investing Strategy:

Managed investing is when you have a professional manage your investments for you, and are charged a fee for them doing so. In most industries it is fair to assume that a professional will get a better performance for you than if you did it yourself. However, as mentioned previously, 92% of managers underperform “the market” and pay you for the privilege.

Generally speaking most working individuals will already have a managed investing strategy as part of their Superannuation or Roth IRA.  These funds invest your money and take a small fee for doing so. There is often big tax advantages for this so the minimal management fee is acceptable.

Managed investing strategies tend to lend themselves more to high net worth individuals. They often have minimum deposit requirements of $50,000-$100,000, and fees can become lower with more money invested. 

There are a few low cost apps coming out that manage your funds for you. They automatically deposit money from your account and invest it in your chosen fund.  This is a good option for people starting out with smaller amounts of fund.

Types of Managed Investing:

  • Mutual Funds (Professionally managed funds)
  • Robo Investing (Automatically deposits your funds and invests on your behalf)

Summary:

Passive- Low cost, low effort level, potential for solid returns

Active- Low cost, Medium-High effort level, Potential for very high or very low returns

Managed- Medium/high costs, low effort, solid returns

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