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Size matters in finding the best investment strategy

Most investment advice you will get out there takes a leaf from the strategies of renowned investors such as Warren Buffet. While it is great to copy from those who did well, choosing a best fit for you will be more rewarding. Investment strategies are much like shoes. Finding the right pair goes a long way towards comfort and mobility.  When I was younger, my parents would buy school shoes at the start of the year. They would always buy a pair which was a size bigger so that they would still fit till the end of the school year. Imagine the discomfort of walking around with an extra-large pair of shoes?

Just like the bad experience I had with my school shoes; using an investing strategy that does not fit you, will not work, simple! It will only leave you with pain and nothing much to show for your efforts.

Seven Investment Strategies

There are many investment strategies to choose from. This article will list some of the most used trading strategies.

  • Value Investing

This strategy involves seeking undervalued stocks. It is based on the belief that the market is not perfect or rational. As such, price fluctuations may happen, and this can cause stock prices to not accurately reflect the stock’s value.  With this method, you look to buy stocks that the market offers at a bargain and profit when the price hits its true value. It is underpinned by a thorough analysis of a company’s performance and financials to determine the intrinsic value of a stock.

  • Growth Investing

To do this, you analyze the company’s financial performance and growth potential. Once you identify a stock that is likely to grow, you buy it in the hope that it will grow in value, and thus the price will increase. Growth investing analyses the past and present company performance and uses that information to make reasonable forecasts about future financial and share price performance.

  • Momentum Investing

This strategy involves seeking to capitalize on over/undervalued stocks based on the belief that losers will always lose and winners will always win. It makes use of technical analysis to identify trends in the price of the stock. Momentum investors will buy and sell based on these trends.

  • Dollar-cost Averaging

Involves continually buying shares over time. This averages out the total purchase price of shares. With this strategy, there is no need to time the market – you simply need to decide how much you are going to use the buy for each period.

  • Active Trading

This strategy works by watching the market and taking positions entirely based on the previous price trends of a stock. This method entirely ignores the fundamentals of the company. It focuses more on charting and following strict buy/sell protocols at each down/upturn. To perfect this skill, robots or expert advisors provide an automated system for trading.

  • Small-caps Strategy

By focusing your attention on small market capitalisation counters or penny stocks which often tend to get ignored, you can find some good bargains. While the rest of the market trades the blue chips and growth stocks you can carve a niche for yourself by profiting on the less prominent stocks.

  • Dividend Investing

Buying companies that have a history of paying out good dividends. This helps to create a steady stream of income.

Here is an interesting infograph on how to get started.

How then do I know which strategy works best for me?

Sticking to my shoe analogy; before you try on a pair of shoes, you must have at least an idea of your size. Finding an investment strategy works in the same way. To know your investment “size”, you should start by asking yourself a few questions.

  • What is my risk appetite?

It can be difficult to gauge how much risk you are willing to bear if you are a new investor. However, taking a consideration of your risk absorption outside of the markets can help.  How much money can you lend to a friend and not want to get a heart attack if you do not get it back? How willing are you to start new ventures or projects? Do you have a growing source of income? How fast do you drive?  These are some of the questions you should ask yourself to measure your tolerance to risk.

  • How much time do I have to invest?

The further you are from retirement, the higher your ability to experiment with these trading strategies. But as you get older, it helps to play it safe.

  • What are the returns earmarked for?

If you plan to use the funds for living expenses, for example then you should find a strategy that has the potential of frequent cash payments such as dividend investing.

  • How do I adopt a Trading Strategy?

Once you determine your “size”, you can begin to try on the different strategies. Sometimes, trial and error is necessary to find the best fit for you. By no means should you stick to a plan which is not yielding the required benefits. Be willing to change and modify your strategy as you go. It also helps to consult an expert.

Final Word

An important point is that you should not blindly follow the buzz around big names or what others are doing. Find the best fit for you because after all size does matter.

Piggy also encourages investors to consider other alternative trading and investing platforms where they can trade instruments such as forex, indices, commodities and global equities (Click on Image)

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