Topic 5: Investment Strategies and their Differences

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“The individual investor should act consistently as an investor and not as a speculator.”

An investment strategy is a set of rules, behaviors or procedures, designed to guide an investor’s selection of an investment portfolio. Individuals have different financial goals and risk tolerances which also make different tactics and strategies more or less appropriate. Investing is not speculating as you have a clear plan what you want to achieve and how you will achieve it.

Overall, there are 2 types of strategies – Passive and active:

Passive Investment Strategies

With passive strategies, you predefine an investment approach you want to apply over time on your chosen asset(s) and follow through it.

Active Investment Strategies

With active strategies, you actively choose and decide when and into what to invest.

We will cover 2 passive and 3 active strategies in this lesson:

Passive Strategies Active Strategies
Dollar Cost Averaging
Value Investing
Buy and Hold
Growth Investing
Momentum Investing

As investing is often times at least as an art as it is a science and all of the strategies have their (dis-)advantages,  it is recommended to combine them based on your individual situation and investment goals: For example, you can invest 70% of your capital with dollar cost averaging, 20% buy and hold and 10% growth investing. Keep this in mind while watching the explanation of these strategies:

As you could see, there are many ways to work towards your investment goals. When deciding which type of strategy to follow, remember that most often, 90% of active investors fail to outperform the market over a 10-year period. So it is for sure not a bad idea to have at least one part of your assets invested passively to ensure you do not reduce your returns through unfavorable investment decisions. Below table helps you to get a better overview on the strategies:

If you want to focus on one strategy, it is recommended for active strategies to cross-check your analysis with results you would get with another strategy. For example, it gives you more confidence to invest into a stock which has strong momentum, qualifies as a growth stock and has no red flags on the fundamentals identified through doing a value investing check.

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