How investment strategies can help Filipino investors
Whether it’s for having a significant retirement nest egg or simply wanting to make your money work for you, we all have our reasons for wanting to dip our toes into the world of investing.
That’s why newbie investors will always have the “why” part figured out.
However, the harder question is, “How?” With so many different ways to invest and even more investment strategies to learn, it can be a bit overwhelming.
And this is exactly what this article is all about. It’s for helping both new and experienced investors decide how to invest their money in a way that suits their financial goals – or in other words, picking an investment strategy.
Note: this article does not constitute financial or investment advice and is meant for informational purposes only.
What is an investment strategy?
An investment strategy is a set of guidelines for investing. The core of your approach will depend on how much knowledge you have, how risk-tolerant you are, and how much time you’re willing to dedicate to the endeavor.
A conservative investor might focus on long-term growth, while a more aggressive one will seek rapid appreciation in value by taking risks with confidence that they can recover quickly from any losses.
Note, too, that investment strategies are not static. They need to be flexible enough to work well in all sorts of market conditions you might face and allow you to maneuver the various pitfalls of investing successfully.
– 4 types of investing strategies –
Depending on your personal goals, investment strategies can take many forms. But there are four major types of investing strategies you have to be familiar with:
1. Growth investing – for long-term gains from promising companies
A growth investing strategy aims to achieve long-term appreciation in value. The main focus is on a given stock’s potential for a future upward trend.
One way to understand what growth investing is all about is to think about growth investors as those looking for “the next big thing”. In contrast to full-blown speculative investing, however, growth investing measures a stock’s current performance against its growth potential.
An investor using a growth investing strategy might buy an initial stake in the stock of a fledgling firm while continuing to monitor its prospects over time. If they think that its potential is high, and if they believe it can be bought at a reasonable price, then they could increase their holdings as more favorable news emerges.
Growth investors look not just at a particular stock, but also the entire industry in which it operates. For example, if you invested in Tesla ten years ago, you were not making a bet solely on Tesla as a company, but on the fact that electric vehicles would become the next booming industry.
Investors using growth strategies seek companies with a solid reputation, established brands or patents, and promising new products set to capture a new market share. Growth investors attempt to assess a stock’s fundamentals and prospects while keeping an eye on the market to time their purchases.
The upside of growth investing is massive, but one major drawback to this strategy is its relative lack of dividends. Because growth stocks require lots of cash to fuel their growth, you cannot expect all that much in terms of dividend payments.
Needless to say, growth investing requires being comfortable with risk. Without consistent dividends to cushion your investment, you will have to be fully committed to seeing your stocks appreciate over the long term.
2. Value investing – buy underrated stocks with strong fundamentals
Value investing is another type of investing strategy that aims to achieve a steady rate of return by focusing on the underlying intrinsic value of an investment. Choosing value stocks is based on fundamentals such as earnings, dividends, and book value.
Investors who rely on this strategy believe they can buy undervalued stocks at lower prices and sell them at a higher price, thus making an attractive profit.
The key shortcoming of this strategy is that since markets are inherently unpredictable, it is not guaranteed that all value stocks will perform as desired.
Value stocks are typically less popular than other kinds of stocks. They tend to be in companies deemed as inert, or out-of-favor businesses with potentially strong balance sheets, but which are often not paying out dividends.
Value investors attempt to buy these high-quality assets at bargain prices—and sell them when the market recognizes their true worth.
The goal is long-term growth. Value investing is recommended for investors who can afford to be patient, lest you miss out on the full value of your investments.
Value investing is a great strategy to take if you can find companies you believe are strong and capable of weathering storms. When executed well, value stocks can generate substantial profits without the pressure of having to predict how the markets will perform.
As you might expect, value investing is not as exciting as growth or speculative strategies since it requires a very long-term perspective. But if you can be patient and ride the wave until your predictions come to bear, you can make a lot of money down the line, without the sleepless nights that come from growth investing.
– Side note: growth versus value investing –
To recap our discussion above: value investors try to purchase shares below their actual value, while growth investors purchase shares that have a higher potential for revenue or earnings than the average company.
Wall Street usually categorizes companies as belonging in one category or another, but it’s more complicated because many stocks can be hybrids. Some growth companies, for example, have already established themselves, and their stocks may be trading at higher prices than the average growth stock.
Remember that both strategies are classified as long-term.
Value investors generally hold onto shares longer than others because of their target shares’ lower prices. Growth investors don’t see large returns until a company begins to show strong earnings.
Probably the biggest difference between value and growth investing is that value investors want to buy stocks; they’re not particularly concerned with the dividends.
Growth investors are more likely to follow a dividend-focused strategy, preferring companies that consistently pass on their profits to those who hold their stock, rather than spending it all to fuel growth.
Both strategies have their respective strengths and weaknesses. Ultimately, it is up to you as an investor to determine which type of strategy works best for your investing needs.
Growth investing could be better for you if you are not particularly concerned about generating immediate income from your portfolio. You must also be able to keep a cool head with big changes in stock prices; with growth stocks, you may see the value of your investment balloon or shrink considerably in a matter of weeks.
Because growth investing takes time, you must have the patience to ride out negative periods for your investments.
Growth stocks benefit investors who are comfortable with taking on a more active role in their portfolio management.
Value investing, on the other hand, is likely better suited to people who want their portfolios to provide a steady stream of dividends as well as capital appreciation down the line.
Value investments are also less volatile than growth investments, which makes them a better choice for investors who want to minimize the amount of risk they take with their investments.
Growth stocks are closely watched by investors and traders, so there may be an opportunity to profit from fluctuations in their prices. On the other hand, if you want your portfolio to work for you largely on autopilot while providing a good balance of dividend payments and growth potential, value stocks may be a better option.
3. Passive investing – buy and hold long-term
An index fund such as the London FTSE 100 Index, that contains the London Stock Exchange’s top 100 companies in terms of market capitalization, is an example of a passive investing buy.
Image credit: Jamie Street
With passive investing, a portfolio is constructed to replicate or track the performance of a benchmark index, such as the S&P 500 which tracks 500 of the biggest companies listed on the US stock market. With this type of investment strategy, you can gain broad exposure to securities in an attempt to match market performance without having to select individual stocks.
Colloquially known as a “buy-and-hold” strategy, passive investing depends on the market delivering positive returns over time. You do not try to out-maneuver the market as a passive investor; instead, you try to ride along with it.
Passive investors hold investments for long periods and do not make regular trading decisions. They don’t rely on market timing or stock-picking skills, but instead follow a patient approach that allows them to benefit from the long-term growth of the underlying index.
The main drawback of this strategy is that it performs poorly in down markets since its movements are tied to the performance of an index instead of individual stocks. You also have less flexibility to respond to market downturns due to the constraints on index fund managers’ activities.
Being a passive investor means that you can avoid the annoyances that come with frequent trading, such as fees that stack up faster than you might expect. However, these benefits come with smaller potential returns. Naturally, passive investments rarely beat the market; when they do beat the market, the returns will generally be smaller.
By taking a passive approach, you will rarely end up as a top performer. In most cases, trying to actively predict market movements is likely to lead to poor returns. So if you are looking for fast gratification in your investment portfolio, or wish to be among the first movers when a hot stock comes along, passive investing will not be the best approach for you.
4. Momentum investing – ride uptrends and monitor stocks
With momentum investing, the stocks with the best past performance are typically selected for investment to take advantage of undervalued or overvalued equities.
Momentum investors tend to be attracted to stocks that have performed well over a short period and continue holding those positions until they begin to underperform. At that point, they sell their investments and move on to new picks. When individual stocks go on a downtrend, momentum investors do not think twice about short-selling and looking for the next big thing.
If you want to succeed as a momentum investor, you must be ready to adjust your portfolio frequently. You must be ready to buy or sell at a moment’s notice—so forget about an active social life when you plan on utilizing this investment strategy.
The major benefit to momentum investing is that you can take advantage of short-term trends instead of trying to forecast the long-term prospects for an entire market or industry sector.
Momentum investing is a good strategy for people looking to diversify their portfolios and capture short-term gains on investments. However, it is not advisable as an investment method to use consistently over time because there are too many variables for long-term success, and the strategy is not a good fit for those looking to take a more cautious approach.
Momentum investing has its proponents, but its real-world efficacy has long been debated.
One major issue is that this strategy depends on making a huge volume of trades every day, which means racking up commission and brokerage fees by the bundle.
Another major drawback is the massive risks you must take to engage in short-selling.
Short-selling, as we mentioned earlier, is a key tactic that momentum investors use to keep their profits growing.
By shorting stocks, investors can profit from their belief that the price of a security will decline in value. Short-selling involves borrowing shares and selling them on the open market, with the hope that you can replace them at a lower price before returning those shares to your broker.
Short-selling can lead to huge spikes in profit, but the risk associated with it is tremendously high.
If you short a stock and it begins to climb, you can be forced to close out of your position at a loss because you do not have enough shares in your possession to make good on your agreement with the broker. The resulting losses could wipe out all of the profits made through other investments as well as those gained through successful short-selling.
– Financial instruments –
Now that you know about the different investment strategies and their differences, let’s take a quick look at the two types of financial instruments that you can invest in.
Financial instruments are any sort of contract that allows investors to trade assets. Broadly speaking, we can divide them into two categories: cash or derivative instruments.
1. Cash instruments
Cash instruments have an intrinsic market value. Securities, which can be readily transferred and exchanged for cash with other individuals in the marketplace, fall under this category.
Cash deposited into your bank account or loans to purchase an item both come under this category because they require an agreement between the lender and borrower before any transfer is made.
2. Derivative instruments
Derivative financial instruments have no intrinsic value. Instead, they derive their value from the performance of one or more underlying entities.
Some examples of underlying entities include indexes, assets, and interest rates. You can also link derivative instruments to bonds, stocks, cryptocurrencies, or the Foreign Exchange Market (FOREX).
Investment strategies: how to pick one that’s right for you
Investment strategies are a way to invest your money that meets your goals for what you intend to achieve or save for.
At the end of the day, it’s about laying out a plan so you can invest your money wisely, realistically, and purposefully to reach the financial goals that are important to you.
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Author: Jason Acidre is the co-founder and publisher of Grit PH – one of the fastest-growing online publications in the finance space in the Philippines. Grit PH’s mission is to “make success accessible to every Filipino”.