An investing strategy guides investment decisions, providing a rational backdrop against which to assess investment prospects and removing emotion from the investment process.
Here's why a good action plan can be what sets successful investors apart.
What's in a plan?
Take a look at history's most famous investors. They are notable not just for their success but for the strategies they used to achieve it. They stuck to their strategies through market booms and busts and came out on top.
Today, Warren Buffett is synonymous with value investing. This is just one possible investment strategy you can follow to inform your investing. There are numerous investing strategies available to Australians. Below, we'll go through the seven most common ones in detail, so you can determine which is right for you.
7 top investing strategies for Australians
An investment strategy is an action plan that helps you choose suitable investments for your financial situation, goals, and risk tolerance. Which approach you choose will depend on your personal preferences and individual circumstances.
You can also choose to use a combination of strategies to meet your needs. The important thing is to use a strategy (or strategies) that work for you and follow through with action.
Your investment strategy will inform the asset allocation in your investment portfolio and how you handle investment risk. Here are some of the most popular investing strategies used by Australians.
1. Growth investing
As the name suggests, growth investing focuses on investments with significant growth prospects. These may be start-ups or smaller companies experiencing rapid growth.
Growth investors look for products and businesses with the potential to cause disruption and change the way things are done. They seek to invest in these company types in their early stages, expecting they will see strong growth. The investor, in turn, expects to receive a significant return in the form of capital growth.
Technology shares are the classic example. Companies like Apple Inc and Microsoft Corporation have produced products that radically changed the market, leading to a shift in consumer behaviour. Growth investors are looking for the next game-changer.
Finding ASX growth stocks is an active investment strategy involving serious analysis. You'll want to look at any potential growth investments' financials, growth prospects, and industry standing. It can help if you have specialist insight into the industry in which a potential investment operates, as this can allow you to understand its prospects better.
2. Value investing
Value investors look for companies they think are undervalued by the stock market. The expectation is that sometime in the future, the stock market will realise the company's intrinsic value, and the share price will increase.
ASX value shares may not necessarily have explosive growth prospects, but they should represent a bargain. That way, when market sentiment becomes more buoyant, the value investor can benefit from rising share prices.
Value investing is also an active investment strategy. You'll need to analyse a company's financial standing and prospects and assess how this stacks up compared to the current share price.
It can take time and patience to identify value stocks and more time and patience for value shares to realise their potential. But the returns from a quality value stock can be lucrative, meaning this is an investment strategy that can reap the rewards.
3. ESG investing
Environmental, social, and corporate governance investing (ESG) incorporates considerations around how businesses impact the natural environment in their operations and how their products and services affect customers' lives.
Also known as impact investing, ESG investing looks for businesses that are gentle on the Earth or at least environmentally and socially responsible. ESG investors want to make a positive impact through their investments and believe investing ethically will also reap financial rewards.
ESG investing may involve negative screening, where companies that do not align with the investor's values are excluded. It can also include positive screening, where investors seek out companies outperforming their peers on ESG factors.
ESG investing can be a reasonably active investment strategy, requiring the investor to conduct appropriate due diligence on investment targets.
4. Dividend investing
Dividend investing involves making investments in companies that are known for paying dividends. Dividends are company profits that are partly distributed to shareholders. Companies that pay dividends are likely to be more mature and established, with reliable income streams. When shareholders are paid dividends, they receive additional income. This income can be used to meet living expenses or reinvested to buy more shares to generate even more income in the future.
Dividend investors seek to maximise investment income. They look for ASX shares with a track record of paying reliable dividends and revenue flows to support the payment of dividends in the future.
This provides a return on investment that is not contingent on capital gain. Dividends can provide a good hedge against inflation, especially if they increase over time, and they may provide tax benefits due to franking.
5. Fund investing
Fund investing involves investing money into funds holding numerous ASX shares rather than investing in individual stocks. Many funds invest in ASX shares, and many of these funds are themselves listed on the ASX.
Funds traded on an exchange are known as exchange-traded funds (ETFs). Investing in funds can be a quick way to diversify your portfolio and provide opportunities for exposure to different investment themes.
Some funds provide broad share market coverage, allowing investors to take a stake in the market's direction as a whole. Some funds focus on specific niches, such as companies in a particular sector or industry.
There are ESG funds, resources funds, banking share funds, and funds focused on sustainable energy, among many others. This means investors can pick a fund (or funds) rather than individual companies to invest in.
6. Buy-and-hold investing
Buy-and-hold investors take a position and ride it out. Over time, equity markets tend to increase in value, but on a day-to-day basis, they can be volatile. Investors that buy and hold are steadfast in sticking with their investment choices for the long term.
This is a more passive investment strategy. Although investment choices need to be researched and assessed at inception, the buy-and-hold investor does not need to reassess their position due to market fluctuations.
Famous investors, including Warren Buffett, have praised the approach, recognising its ability to deliver healthy long-term returns.
Portfolios are kept relatively stable over time, investment fees are kept low, and the costs of active management are avoided. Investors can also defer taxes on capital gains if assets are held rather than sold.
Buy-and-hold investors may utilise another investment strategy, such as buying value shares, while also employing the base strategy of buying and holding.
7. Fundamental vs. technical analysis
Investors can use both fundamental and technical analysis to assess the prospects of their potential investments. Fundamental analysis involves examining the financial and economic factors that impact a business to assess its value.
Technical analysis uses a share's price movement data to predict its future performance. These are two different approaches to assessing share value, and there is much debate about which is preferable.
Fundamental analysis is grounded in a company's cash flow, with analysts examining financial statements for insights into value. Looking at things such as the income and balance sheet of the company, fundamental analysis attempts to assess the future cash flows an investment in the company will generate.
These are then discounted to determine their present value. Technical analysts believe that all relevant information about a company is incorporated into its share price. Instead, they focus on the price movement to discern its future direction.
How to choose the best investment strategy for you
When starting out on your investment journey, it is essential to have a plan to guide your actions. Your investing strategy helps you plan the journey, so it's important that it works for you.
Which strategy (or strategies) you choose will depend on your financial circumstances, investment objectives, and attitude to investment risk. It also depends on whether you are interested in active investing or prefer a passive approach.
Different investment strategies can suit different investors and market conditions. Active strategies require more input from investors, while passive investing requires less. Regardless of which approach you use, there are some basic investment principles you can follow to optimise your journey:
- Choose a suitable investment account: To buy or sell shares or funds, you'll need a brokerage account. There are a bunch of online brokers that Australian investors can choose from to handle their trading. Look at account and trading fees to ensure you get the right deal for your plans.
- Invest consistently: Once you've opened your brokerage account, you'll need to fund it before you can start buying ASX shares. Try to make it a habit to set money aside to invest regularly. This creates momentum, which can supercharge long-term returns.
- Diversify: Diversification is the practice of investing in different sectors and asset classes. This can act as a hedge against volatility.
- Have a long-term time horizon: Investing is about setting yourself up for the future, not getting rich quickly. Holding on for the long haul and gradually adding to your portfolio will allow your returns to compound over time.
- Keep learning. Make sure you understand what you are invested in and what factors may impact its performance. Research companies you are interested in and the industries in which they operate. You can't expect to know everything overnight, but you should work towards expanding your knowledge and wealth over time.
Ultimately, an investment strategy will only work if it's implemented. It can be tempting to delay our investment journey endlessly, waiting until we have more time, money, or both.
But getting started is the most crucial part of your investment journey. The earlier you start, the more time you have to allow your returns to compound and build your wealth. Over time, the effects of this can add up — just look at Warren Buffett's example.
Wherever you are on your investment journey, having an investment strategy can help you reach your financial goals sooner. Choosing an approach that complements your style and is aligned with your goals can guide your decision-making, helping smooth the investing process.
Whether you want to encourage sustainability or take a stake in the latest technology, there is an investment strategy that will work for you.