An investment strategy can be described as a plan according to which an investor makes his decisions for an investment. In other words, it forms a concept for an investment. It is tailored to the personal risk tolerance and the specific interests of the individual investor.
Investment strategies differ in their risk-reward profile, and the following questions, among others, must be answered in advance:
- What is the investor’s investment objective?
- What investment horizon is available?
- What is the investor’s individual situation?
- What risk can and does the investor want to take?
What investors should look for in an investment strategy
Regardless of the investment strategy, it is important to pay attention to diversification, that is, spreading the investment. This means selecting investments so that gains depend on a variety of factors. “It’s all in the mix,” you might say in this case.
For example, if you are split between stocks and ETFs, losses in one of these areas can be offset with gains from the other. Diversification by country and industry is also possible. Investors can choose between five asset classes. The end result, however, should always be a balanced investment strategy. This is also referred to as the “balanced investor.
But: There are many different demarcations. However, the characteristics and approaches overlap to some extent. However, there is no universal strategy that fits every investor. Behind every strategy is a well thought-out and planned buying and selling behavior that can lead to success. However, this is also possible without theoretical knowledge. Whether investors follow a strategy or invest on gut instinct is a personal preference.
The different investment classes
- Deposits (for example, a savings account or ETF savings plan)
- Securities (for example, stocks, bonds and funds)
- Real estate (for example, home ownership, real estate crowdinvesting)
- Commodities (for example, precious metals such as gold or energy commodities)
- Alternative investments (for example, private equity funds or hedge funds)
What makes an investment strategy?
As already mentioned, the personal investment strategy can be determined by many factors. These include, for example, the investor’s risk tolerance and the investment assets. But investment funds also pursue certain strategies. For example, there are investments that provide income or are focused on growth. Other funds passively track a particular market. Then there are funds that are actively managed, where investors personally select investments with the goal of generating stronger returns.
The different strategy types
- The conservative investor (prioritizes security over returns)
- The balanced investor (focuses mainly on security, but also appreciates an admixture with an above-average risk-reward profile)
- The dynamic investor (deliberately focuses on a high risk-reward profile)
The risk classification of investment instruments
As an investor, you must always keep certain risks in mind when making investments. We will now explain the most important ones.
Risk of failure
This is the risk that an investor may suffer a partial or even total loss of his investment. This can happen, for example, if the debtor becomes insolvent.
In this case, there is a risk that an investment sum cannot be liquidated at all at the desired time, or can only be liquidated at a discount to the actual value or at high cost. This risk can occur, for example, in the case of a property that is to be or must be sold in the middle of an economic downturn.
Market price risk
Market price risk means that the market price of an investment will fall permanently or temporarily. It also includes interest rate risk. This can happen, for example, with a share in a weak stock market phase.
These investment options are available
Once you, as an investor, have determined what type of investment you tend to make and what maturities are possible for an investment, the investment strategy and the composition of the portfolio will result. Cash reserves in the form of a call account are a must. After all, without liquidity, investors risk having to sell at a bad time. The following time horizons should be considered when investing:
- Call money (money is available at any time)
- Stocks and stock funds (minimum holding period is five years)
- Fixed-interest securities (can be sold every trading day, but the holding period should be based on the term of the security)
- Standard certificates (usually have a term of between twelve and 18 months)
- Time deposits (the investor decides on the maturity period)
Investment strategies: How to choose
After investors have set their goals, they can consider which investment strategy to follow. Many well-known investors rely on a variety of strategies. Because there is so much choice, it can be hard to keep track. We have compiled a selection of the most important and well-known investment strategies.
Buy & Hold strategy
The world-famous investor Warren Buffet relies on the “buy & hold” strategy. He buys individual shares in companies and holds them for the long term. In doing so, he hopes for a steady increase in value. Investors have little effort with this strategy and it is possible to invest diversified if one buys different company shares in different industries. Long-term in this case describes a period of five to 20 years or even longer. The basis of this theory is that short-term price fluctuations always occur and it is difficult to find the best time to buy or sell securities. It does not matter whether the economy is in an upswing or a recession. Therefore, it is better to hold on to an investment over a long period of time and go for long-term gains.
The index strategy is a passive investment strategy. Its approach is not to invest in individual stocks, but to track a complete stock index such as the DAX or the Dow Jones. The return therefore corresponds to the performance of the selected index. Passive funds are called ETFs.
Investors who invest according to the size strategy go by company size. They expect large publicly traded companies to experience little price fluctuation. This strategy focuses on stability and low risk.
In the growth strategy, investors invest in shares of companies that they expect to grow in the coming years. These can also be companies that are not currently among the big winners, such as young companies from the software sector. However, there is a high risk here because many start-ups remain unsuccessful.
The value strategy works in a similar way to the growth strategy. Here, however, future value growth is not forecast on the basis of stock market data, but through precise company analyses. This includes all business data and the market environment. This strategy requires extensive market knowledge.
Tip: Warren Buffet is the most successful investor of all time thanks to value investing and the dividend strategy. In our guide, we show you how you can imitate the investment strategy of the stock market oracle.
Anyone who is involved in the stock market has certainly heard the terms “going long” and “going short”. “Going short” means that the investor buys a security and hopes for falling prices. The goal is to buy this position later at cheaper prices and pocket the difference as a price gain. When investors “go long,” they buy the security hoping for a price increase.
Investors should not arbitrarily decide whether to position their portfolio majority “long” or “short”. Trend indicators are one way to determine the basic direction of the portfolio. They help to identify whether prices on the stock markets are rising or falling. This strategy may sound simple in theory, but it requires a lot of expertise and experience to implement.
Trend determination strategy
The trend determination strategy can be performed in three different ways. The first variant is carried out with trend lines and trend channels. The idea comes from the “classical” chart theory. Here, investors connect different extreme points of a security. So they draw a trend line in the price chart. The upward or downward trend is intact until the lines are broken.
The second variant works with moving averages. This allows investors to get a quick impression of the chart condition of a security. The average is formed with any number of price information over any period of time. Depending on the indicator, investors weight all prices equally or differently. If the price is above the average line, one speaks of an upward trend.
The third variant is the principle of market technique. This is a basic element of the Dow theory. It was founded by Charles Dow at the end of the 19th century. It states that movement thrusts and correction phases regularly alternate. An upward trend is defined by the fact that each new high point is higher than the previous one. It is exactly the other way around for downtrends with lows.
Investing during a crisis
Investors wonder how to invest their money during a crisis. Especially during the Corona crisis, which turned the world upside down and brought a stock market crash, this was a big issue.
As an investor, you should know that selling stocks out of fear at some point is not a strategy. What was true before the crisis is also true during it. Diversification is the key point in investment strategy. If you spread your capital across different products, you ensure greater stability in your portfolio. It also makes sense not to invest everything at once. It is advisable to always invest roughly equal amounts in the market at different times, spread over different products.
Tip: Even during a crisis, investors should not lose sight of the return for the sake of security. If you simply want to park your money, you can also put it in a safe. Whether investors invest in active or passive funds is a personal preference and depends on various aspects: for example, costs, management and diversification. An ETF is usually very broadly diversified. Therefore, ETF savers can take a much bolder approach than investors who rely on individual stocks. Caution is advised with the latter. Investors should consider beforehand which companies could benefit from the crisis. These could be companies in the healthcare or telecommunications sectors, for example.
In this strategy, investors focus on regular dividend payouts. Your focus is therefore on the company’s dividend, which is paid out, and on the share price performance.
Dividends – did you know?
A stock corporation gives its investors a share of its profits in the form of a dividend – but not every company does this. Dividends are a form of profit sharing and are usually paid out annually. Companies use part of their profits to invest in their own progress, and the rest is distributed to the company’s shareholders. Investors can participate in the dividend by purchasing shares.
The countercyclical investment strategy
With this investment strategy, investors do not swim with the crowd, but against it. The basic principle of countercyclical investing is simple: buy company shares when prices are low and sell them when prices are rising. In other words, you get in when everyone else is selling their paper. However, the practical implementation of this concept is more difficult. Before investing money, investors must first identify companies that are undervalued on the stock market but have potential for the future: If the fundamental values of a company are better than its market value, this can be a reason for an investment. Anti-cyclical investors then use these opportunities to buy. However, even with good timing and patience, they can by no means be sure that the value of a company with potential will actually rise and reward the investor with price gains for his speculative investment. The countercyclical investment strategy is therefore more suitable for investors who are risk-aware and have already been able to gain market knowledge.
The procyclical investment strategy
The opposite of the countercyclical strategy is the procyclical strategy. Here, investors invest in companies that are currently performing well and can be predicted to do so in the near future. It is also called the momentum strategy because it focuses on what is currently happening.