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finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of f ...
, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an
investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is ...
portfolio. Individuals have different profit objectives, and their individual skills make different tactics and strategies appropriate. Some choices involve a tradeoff between risk and return. Most investors fall somewhere in between, accepting some risk for the expectation of higher returns. Investors frequently pick investments to hedge themselves against
inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
. During periods of high inflation investments such as
shares In financial markets, a share is a unit of equity ownership in the capital stock of a corporation, and can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Share capital refers to all of the shares of ...
tend to perform less well in real terms. Time horizon of investments. Investments such as shares should be invested into with the time frame of a minimum of 5 years in mind. It is recommended in finance a minimum of 6 months to 12 months expenses in a rainy-day current account, giving instant access before investing in riskier investments than an instant access account. It is also recommended no more than 90% of your money in non-instant access shares. Unexpected expenses can happen. If someone does not have an income an income can be created by using share income funds.


Strategies

* No strategy: Investors who don't have a strategy have been called Sheep. Arbitrary choices modeled on throwing darts at a page (referencing earlier decades when stock prices were listed daily in the newspapers) have been called Blind Folded Monkeys Throwing Darts o source This famous test had debatable outcomes. * Active vs Passive: Passive strategies like buy and hold and passive indexing are often used to minimize transaction costs. Passive investors don't believe it is possible to time the market. Active strategies such as momentum trading are an attempt to outperform benchmark indexes. Active investors believe they have the better than average skills. * Momentum Trading: One strategy is to select investments based on their recent past performance. Stocks that had higher returns for the recent 3 to 12 months tend to continue to perform better for the next few months compared to the stocks that had lower returns for the recent 3 to 12 months. There is evidence both for and against this strategy. * Buy and Hold: This strategy involves buying company shares or funds and holding them for a long period. It is a long term investment strategy, based on the concept that in the long run equity markets give a good rate of return despite periods of volatility or decline. This viewpoint also holds that
market timing Market timing is the strategy of making buying or selling decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting fr ...
, that one can enter the market on the lows and sell on the highs, does not work for small investors, so it is better to simply buy and hold. * Long Short Strategy: A long short strategy consists of selecting a universe of equities and ranking them according to a combined
alpha factor The α-factor is used to predict the solid–liquid interface type of a material during solidification. Method According to John E. Gruzleski in his book Microstructure Development During Metalcasting (1996): α = (L/k*TE)*(η/v) where L is l ...
. Given the rankings we long the top percentile and short the bottom percentile of securities once every re-balancing period. * Indexing: Indexing is where an investor buys a small proportion of all the shares in a market index such as the
S&P 500 The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of ...
, or more likely, an index
mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICA ...
or an
exchange-traded fund An exchange-traded fund (ETF) is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold from other owners throughout th ...
(ETF). This can be either a passive strategy if held for long periods, or an active strategy if the index is used to enter and exit the market quickly. * Developed markets vs emerging markets: Many people use developed stock markets because they are believed to be safer than emerging markets. When investing globally you have the risk of changes in currency exchange rates on top of stock market performance. Other people pick emerging markets believing the emerging markets have higher potential for GDP growth which in turn would then affect positively the share prices in those countries. Emerging stock markets can be less well-regulated than those in the developed markets increasing risks and have greater political risks associated. The most common way of investing in global markets is through funds. * Pairs Trading: Pairs trade is a trading strategy that consists of identifying similar pairs of stocks and taking a linear combination of their price so that the result is a stationary time-series. We can then compute
Altman_Z-score Example of an Excel spreadsheet that uses Altman Z-score to predict the probability that a firm will go into bankruptcy within two years ">bankruptcy.html" ;"title="probability that a firm will go into bankruptcy">probability that a firm will ...
for the stationary signal and trade on the spread assuming mean reversion: short the top asset and long the bottom asset. * Value vs Growth: Value investing strategy looks at the intrinsic value of a company and value investors seek stocks of companies that they believed are undervalued. Growth investment strategy looks at the growth potential of a company and when a company that has expected earning growth that is higher than companies in the same industry or the market as a whole, it will attract the growth investors who are seeking to maximize their capital gain.

Be careful of value traps. This is where stocks have good P/E ratios or NAV’s (net asset values) because the stock or sector is not predicted to do well into the future by the investor public e.g. in a declining market. It can also happen if a company’s past performance has not been good in the past after a sharp selloff. * Dividend growth investing: This strategy involves investing in company shares according to the future dividends forecast to be paid. Companies that pay consistent and predictable dividends tend to have less volatile share prices. Well-established dividend-paying companies will aim to increase their dividend payment each year, and those who make an increase for 25 consecutive years are referred to as a dividend aristocrat. Investors who reinvest the dividends are able to benefit from
compounding In the field of pharmacy, compounding (performed in compounding pharmacies) is preparation of a custom formulation of a medication to fit a unique need of a patient that cannot be met with commercially available products. This may be done for me ...
of their investment over the longer term, whether directly invested or through a Dividend Reinvestment Plan (DRIP). * Dollar cost averaging: The
dollar cost averaging Dollar cost averaging (DCA) is an investment strategy that aims to apply value investing principles to regular investment. The term was first coined by Benjamin Graham in his book '' The Intelligent Investor''. Graham writes that dollar cost avera ...
strategy is aimed at reducing the risk of incurring substantial losses resulted when the entire principal sum is invested just before the market falls. * Contrarian investment: A contrarian investment strategy consists of selecting good companies in time of down market and buying a lot of shares of that company in order to make a long-term profit. In time of economic decline, there are many opportunities to buy good shares at reasonable prices. But, what makes a company good for shareholders? A good company is one that focuses on the long term value, the quality of what it offers or the share price. This company must have a durable competitive advantage, which means that it has a market position or branding which either prevents easy access by competitors or controls a scarce raw material source. Some examples of companies that response to these criteria are in the field of insurance, soft drinks, shoes, chocolates, home building, furniture and many more. We can see that there is nothing “fancy” or special about these fields of investment: they are commonly used by each and every one of us. Many variables must be taken into consideration when making the final decision for the choice of the company. Some of them are: **The company must be in a growing industry. **The company cannot be vulnerable to competition. **The company must have its earnings on an upward trend. **The company must have a consistent return on invested capital. **The company must be flexible to adjust prices for inflation. * Smaller companies: Historically medium-sized companies have outperformed large cap companies on the Stock market. Smaller companies again have had even higher returns. The very best returns by market cap size historically are from micro-cap companies. Investors using this strategy buy companies based on their small market cap size on the stock exchange. One of the greatest investors,
Warren Buffett Warren Edward Buffett ( ; born August 30, 1930) is an American business magnate, investor, and philanthropist. He is currently the chairman and CEO of Berkshire Hathaway. He is one of the most successful investors in the world and has a net ...
, made money in small companies early in his career combining it with value investing. He bought small companies with low P/E ratios and high assets to market cap.


See also

* Asset allocation * Buy and hold *
Bond (finance) In finance, a bond is a type of security under which the issuer ( debtor) owes the holder ( creditor) a debt, and is obliged – depending on the terms – to repay the principal (i.e. amount borrowed) of the bond at the maturity date as wel ...
*
CAN SLIM CAN SLIM refers to the acronym developed by the American stock research and education company '' Investor's Business Daily'' (''IBD''). ''IBD'' claims CANSLIM represents the seven characteristics that top-performing stocks often share before making ...
*
Contrarian investing Contrarian Investing is an investment strategy that is characterized by purchasing and selling in contrast to the prevailing sentiment of the time. A contrarian believes that certain crowd behavior among investors can lead to exploitable mispric ...
* Financial adviser *
Intertemporal portfolio choice Intertemporal portfolio choice is the process of allocating one's investable wealth to various assets, especially financial assets, repeatedly over time, in such a way as to optimize some criterion. The set of asset proportions at any time defines ...
*
Investment fund An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investment by a significant percentage. These advantages inc ...
* Liability-driven investment strategy *
List of stock exchanges This is a list of major stock exchanges. Those futures exchanges that also offer trading in securities besides trading in futures contracts are listed both here and in the list of futures exchanges. There are sixteen stock exchanges in the wor ...
*
Market timing Market timing is the strategy of making buying or selling decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting fr ...
*
Portfolio optimization Portfolio optimization is the process of selecting the best portfolio (asset distribution), out of the set of all portfolios being considered, according to some objective. The objective typically maximizes factors such as expected return, and mini ...
*
Stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, ...
* Time-weighted return on investment * Trend following


References

{{reflist


External links


The Journal of Investment Strategies

Quantopian Lecture Series
Investment Investment management