effective investing strategies

Investing Strategies for the Modern Age

by Joshua Swartz

The financial success of your investment portfolio depends directly on the investment strategies you employ. When you choose the right products and investment mix, you can take advantage of what Albert Einstein considered mankind’s greatest invention: “compound interest.”  Solid investment plans include long-term as well as short-term goals specifically tailored to your risk tolerance and time horizon. Your portfolio should include battle-tested strategies with a mix of more timely best practices to capitalize on current trends and events.

This article will cover some time-tested strategies along with a few new best practices. There are a myriad of investment strategies to consider, each with positives and negatives. We will cover the highlights of these methods. Additional articles in this series will include deeper dives on topics like:

  • Tactical vs. Strategic Asset Allocation Models
  • Understanding How to Re-invest Portfolio Income
  • Understanding Preferred Dividends’ Place in Your Portfolio
  •  The Role of a Wealth Advisor in Building a Balanced Portfolio

Investing 101

There’s no one-size-fits-all investment portfolio or retirement strategy, but there are overarching goals that smart investment plans gravitate around:

  • Achieve growth and capital preservation
  • Minimize risk or loss of capital
  • Refine your plan over time to keep pace with your goals and life changes

Selecting and deploying the best strategies will be up to you and your trusted advisor. It should be custom-built around your special circumstances, life events and even future situations. 

The key is to identify your investment style and focus on your objectives and incorporate the strategies that are a good match for your objectives, as opposed jumping on to hot commodities or passing market trends. Learning about different investment portfolio strategies and working with highly talented, award-winning professionals who will help you do a deep dive into your goals and investment aspirations will round out your knowledge of investing in today’s economic climate, especially if you neither have the time nor the inclination to become an expert yourself. 

But regardless of if you plan to place the entirety of your portfolio in the hands of a wealth advisor or do it yourself, understanding the following investing strategies will be key to successfully building your income.

Value Investing

Bargain hunting is the name of the game. This investment strategy focuses on unloved, undervalued or under-the-radar assets — and buying them at deep discounts. Such assets can be stocks, mutual funds, ETFs, bonds, real estate and even investments in private companies. Generally, these investments look cheap as relative to their sales, earnings and other fundamentals. 

Many bargain hunters use the price-earnings ratio (“P/E”) as a tool for quickly identifying undervalued or cheap stocks. Divide the stock’s share price by its earnings per share: the lower the P/E ratio, the better potential deal. Value investors effectively attempt to get a stock or an asset at a discounted price and make money on it if the price eventually reflects the intrinsic value of the asset’s fundamentals. One potential risk to consider is a deeply discounted price does not guarantee that it will rise again.

Growth Investing

Growth investors seek assets that seem to be driving in the “fast lane.” These stocks often have powerful brand loyalty, a compelling narrative and very strong sales growth rates. Growth investing generally makes money through price appreciation versus income or dividends. Growth investors seek assets that are growing more quickly and more than the market at large. For example, growth companies tend to represent exciting new concepts or technologies.

Growth assets are often propelled higher on future earnings power. As a result, they tend to represent new, faster-moving industries or sectors with stronger than average growth. It’s still very important to do your homework on what any given companies are doing, because the same growth propulsion can sometimes mean that their P/E or other fundamentals are too disjointed to justify longer term. For those reasons, these high-flying assets often carry more risk and are generally more expensive to buy and hold.

Momentum Investing

Momentum investing is based on the premise that recent performance has a propensity to continue. So if an asset price has been moving explosively upward, it should continue to do so over the short term. Investors can find momentum price trends in several ways, including looking at the percentage of stocks within 10% of their 52-week highs. 

Momentum investing also has inherent risk because once more investors pile into the asset, the same momentum can dislocate asset prices from their fair value, which can create detrimental price reversals. Momentum investing should be treated as a short-term strategy.

Dollar-Cost Averaging

The main goal of dollar-cost averaging is to mitigate market volatility risk. It’s the process of investing the same dollar amount in a specific asset over regular time intervals. You invest the same amount every time, regardless of the asset’s price. 

Imagine you have $1,200 to invest each and every month. You decide to deploy that cash to buy shares of an S&P 500 ETF (Exchange-Traded Fund) on a monthly basis. Let’s say the ETF is trading at $400 per share. In the first month, your $1,200 would buy 3 shares of the ETF ($1,200 divided by $400 per share = 3 shares). Next month, if the ETF price goes up to $450, your $1,200 would yield you roughly 2.66 shares ($1,200 divided by $450 per share = ~2.667). If the asset price decreases in price to $300 per share, your $1,200 monthly amount would buy you 4 shares ($1,200 divided by $300 = 4 shares).

Effectively when the market goes down, your cash goes farther. If the market goes up, your money buys fewer shares. The clear advantage of this method is that you spread out your risk. Another big advantage of dollar-cost averaging is that it automates the process and keeps your cash working for you and helps prevent you from panic selling. The drawback of this method is that if the market is trending upward over a longer period of time, lump-sum investing has historically outperformed dollar-cost averaging.

Buy and Hold Strategy

Warren Buffet, the legendary investor, is an outspoken champion of this long-term investing strategy. As the name implies, it requires you to purchase assets and hold them for extended periods of time, sometimes in excess of 10 years or more. Investors with retirement horizons of 10 years or greater are naturally well-suited to this method because of its simplicity. 

The primary concept of this methodology is that markets will fluctuate, especially over the short term. Buffett likens buying and trading assets over a short time period to gambling. Over the long term, the asset has time to grow and work through any minor setbacks in price — especially when coupled with Value Investing, because the discounted price has time to reflect the stronger fundamentals. The debate between stock pickers and passive buy and hold index funds is contentious, but does tend to favor passive funds.

Buy and hold investing strategies can apply to nearly any type of asset from stocks, bonds and real estate to ownership in private investments. This method is based largely on the idea that, given enough time, a fundamentally strong company or asset will appreciate in value. However, its greatest strength can also be perceived as its downside, because it may take several years, in some cases, to reach meaningful appreciation, if ever.

Diversification

Diversification aims to minimize investment risk. If you had a crystal ball and were able to predict the future, you would simply pick the “next big thing,” maximize your profit and repeat. Unfortunately, the real world is chock full of uncertainty and market fluctuations. Thus, diversification strategy’s primary goal isn’t to maximize returns directly, but rather to minimize risk. Investors who concentrate their holdings in one or a limited number of assets are naturally exposed to much greater downside risk, if the investments were to experience any short- or long-term shock. 

Diversification discourages the “put all your eggs in one basket” approach. Investors should diversify their assets across several asset classes. Each asset class has varying levels of risk and returns and can mitigate some risk, although it does not guarantee returns or protect against losses.

The S&P 500 is a great example of a diversification strategy. It is the benchmark for many leading mutual funds, portfolio managers and ETFs. It consists of 11 different sectors or industries: technology, communication services, consumer discretionary, consumer staples, energy, financial, health care, industrials, materials, real estate and utilities.

Many notable investors, including Vanguard’s founder Jack Bogle and Berkshire Hathaway’s Buffett, are ardent advocates for people to invest in S&P 500 index funds. Buffett has even left instructions that 90% of his fortune be invested in S&P 500 funds upon his death, stating: “There’s no better bet than America.”

Modern Portfolio Theory (MPT)

Modern Portfolio Theory, or MPT,  was developed by Harry Markowitz. He eventually won a Nobel Memorial Prize in Economic Sciences in 1990. MPT considers how one component investment can disrupt an investor’s entire portfolio. In 1952, Markowitz’s paper, “Portfolio Selection,” was published in  The Journal of Finance by the American Finance Association. MPT attempts to create and construct a portfolio of assets to maximize returns within a given level of risk. He set out  to prevent “idiosyncratic risk,” or the risk inherent in each investment because of its own unique characteristics.

Modern Portfolio Theory appeals to risk-averse investors because they can construct a portfolio that minimizes risk for a given level of expected return. Markowitz showed that by taking a portfolio as a whole, it was less volatile than the sum of its parts. If some of the portfolio assets fall due to exogenic (or any other type of) market conditions, other assets should rise an equal amount in compensation.

Opponents of MPT say that it doesn’t deal with issues in real-time or in the real world, because the MPT measures used for its calculations are based on projected values versus current or existing values. Consequently, MPT makes investing look more organized — despite a reality that could be much more chaotic.

What to Do Next?

Navigating the ever-changing world of investing strategies can be difficult for even the most dedicated market followers to manage. So while educating yourself is key, so is choosing the right partner to help you understand which strategies will help you achieve your financial goals. 

That is where Gratus Capital comes in. Our award-winning team can help you identify how and where to invest to diversify your portfolio, achieve financial independence and even solidify generational wealth for your family. Reach out today to learn how we can help you maximize your money. 

Sources:

Here are the average retirement savings by age: Is it enough? – MarketWatch

What are value stocks? Value investing explained for beginners (cnbc.com)

https://www.fool.com/investing/growth-investing-step-by-step-guide.aspx

Momentum trading strategies – Fidelity

Dollar-Cost Averaging: How Does DCA Work, And Should You Do It? | Kiplinger

How to invest a lump sum of money | Vanguard

Buy and Hold Definition (investopedia.com)

7 diversification strategies for your investment portfolio (usbank.com)

https://www.axa-im.com/documents/20195/6567986/18-UK-010037-+30+Years+of+US+Small+Cap+Investing_WEB.pdf/b9d0e2ea-f54e-379c-8af4-fa2ed0af3cbd

Warren Buffett wants 90% of his estate invested in index funds (cnbc.com)

Modern Portfolio Theory (MPT) (investopedia.com)

markowitz_JF.pdf (ust.hk)