Understanding The 5 Key Types of Investment Strategies

As you embark on your investment journey, it's prudent to consider fundamental queries: What are your financial aims? When do you plan to retire? What is your risk tolerance? Have you determined allocations for stocks, bonds, or alternative investments? This is where the significance of investment strategies becomes evident. Let's delve deeper into the 5 key types of strategies and find out which is most suitable for you.

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What Is An Investment Strategy?

What constitutes an investment strategy? An investment strategy denotes a systematic approach guiding the selection of investments within your portfolio. Effective strategies aim to align with your financial objectives, facilitating wealth accumulation while maintaining a tolerable level of risk. Thus, your chosen strategy can influence various aspects, from the composition of asset types to your buying and selling tactics. To get you started, let's begin with understanding the 5 key types of investment strategies:

Passive Investing

Passive Investing
Exchange Traded Funds, commonly known as ETFs, is one of the best ways to kickstart your passive investing strategy. These funds mirror an index linked to a diverse array of assets. For instance, Singapore's renowned ETF, the Straits Times Index (STI), follows the performance of the top 30 companies listed on the Singapore Exchange (SGX). Investing in such ETFs offers a higher level of diversification compared to investing solely in individual stocks.

Robo advisors such as Syfe, Stashaway, and AutoWealth also provide an alternative passive investment avenue. Primarily driven by algorithms, most robo advisors make investment decisions without human intervention. Their portfolios typically comprise ETFs, among other assets.

Value Investing

Value Investing
Value investing is an investment strategy that involves selecting stocks that are perceived to be undervalued by the market. In value investing, investors typically look for stocks that are trading at a price below their intrinsic value, based on fundamental analysis such as earnings, dividends, book value, and other financial metrics. The goal of value investing is to buy these undervalued stocks and hold them until the market recognizes their true worth, leading to capital appreciation.

Growth Investing

Growth Investing
This strategy is a broader strategy of value investing which also involves engaging in active stock picking and purchasing stocks at low prices and selling them at high ones. However, this approach demands greater effort, requiring constant market monitoring and prompt decision-making for buying or selling stocks.

In addition, active stock picking refers to the broader practice of selecting individual stocks based on various factors, including but not limited to value. These factors include financial analysis, market trends, company performance, and economic conditions.

Hands-off Investing

Hands-off Investing
This strategy requires the least effort among all the ones highlighted here as it encompasses buying insurance products with an investment component, like Investment-Linked Plans (ILPs) or investing in a unit trust, which are all even more passive than the passive investing strategy mentioned above. All you have to do is dutifully pay your premiums to the insurance company, and they use your money to buy units in their professionally-managed funds.

Dividend Investing

Dividend Investing
Dividend investing involves building an investment portfolio with a primary focus on stocks or other securities that pay regular dividends. Dividends are cash payments distributed by companies to their shareholders as a portion of the company's profits. Investors who prioritize dividend income seek to benefit from a steady stream of passive income, making it a popular strategy for long-term wealth accumulation.

Which Investment Strategy Should I Pick?

For low to moderate-risk investors

- Passive investing
If you are a passive investor, you may prefer to take the safer route to financial security and may have a lower tolerance for risk. ETFs may be more apt for you, as it is mostly about compounding interest that brings in relatively consistent return, and that the original amount invested never decreases. The most cost-effective method to purchase and retain ETFs is through an online investment brokerage, which you can conveniently compare on MoneySmart.

- Hands-off investing
This strategy works for you if you prefer to let someone else manage your portfolios – such as fund managers, or via investment-linked insurance policies. You prefer the convenience of hands-off investing because you may not have the time or bandwidth to execute in-depth research nor spend time on the actual investment process. One of your major concerns will surround finding a trustworthy and reliable fund manager who will get you the results you have in mind. Do take note that your fund manager’s fees will be deducted from your investment returns.

For moderate to high-risk investors

- Value investing
You’re willing to buy “hidden gems” in the stock market at lower-than-expected prices. You would only sell these gems when the prices meet your expectations and projections – but this can take a long time. You critically analyse the market and use fundamental analysis to identify companies that are underpriced. For instance, you would be interested to research and buy stocks of a publicly-traded tech company which promises to solve certain real-world problems within the next 2 to 10 years.

- Growth investing
When you’re a more experienced investor and looking to gain (and lose) money within the shortest time possible. Growth investing requires a greater appetite for risk, higher tolerance for losses, willingness to take losses for the opportunity of a bigger future payoff, and that strategy to “time” the market is crucial – buying when prices bottom out and selling when they peak. However, do note that this trading strategy is not suitable for amateur investors as you will need experience and knowledge of chart reading, indicators, and fundamental investment analysis.

- Dividend investing
If you’re planning to adopt this strategy, there are a wide range of factors to think about such as:

Stock selection: Such investors often target stocks of companies with a history of consistent dividend payments. Common sectors for dividend investing include real estate investment trusts (REITs), banking, utilities, and telecommunications.

Dividend yield: This yield is a crucial metric for dividend investors as it represents the annual dividend income as a percentage of the stock's current market price. Investors often look for stocks with a balance between a reasonable dividend yield and the company's stability and growth potential.

Steady income and long-term growth: One of the primary goals of dividend investing is to create a reliable income stream. Many investors, especially those planning for retirement, appreciate the regular cash flow provided by dividends, which can be used for living expenses or reinvested to compound wealth and the potential for capital appreciation.

Dividend Reinvestment Plans (DRIPs): Some investors choose to reinvest their dividends back into the same stocks through Dividend Reinvestment Plans. This allows for the compounding of returns over time, potentially increasing the number of shares held and, consequently, future dividend income.

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Best Investment Platforms To Test Your Strategies

Choosing the best platform to start investing in depends on various factors, including your investment goals, risk tolerance, preferred investment types, and level of experience. Here are some popular platforms across different categories:

Robo-advisors

Robo-Advisors
Automated investment management services, often based on algorithms and without the need for human intervention are what robo-advisors provide. They are suitable for beginners and those looking for a hands-off approach to investing. Examples include Betterment, Wealthfront, and Wealthsimple.

Online brokerage platforms

Online Brokerage Platforms
These platforms allow you to buy and sell investments such as stocks, bonds, ETFs, and mutual funds. They offer more control and flexibility compared to robo-advisors but may require more active management. Examples include Robinhood, TD Ameritrade, Fidelity, and Charles Schwab.

Micro-investing apps

Micro-investing apps
These apps allow you to invest small amounts of money into diversified portfolios or individual stocks. They are ideal for beginners or those with limited funds to invest. Examples include Acorns, Stash, and Robinhood's fractional shares feature.

Cryptocurrency exchanges

Cryptocurrency exchanges
If you're interested in investing in cryptocurrencies, you can use cryptocurrency exchanges like Coinbase, Binance, and Kraken. These platforms allow you to buy, sell, and trade various cryptocurrencies.

Real estate crowdfunding platforms

Real estate crowdfunding platforms
IFor those who are keen in real estate investing but don't want to buy physical properties, this is a good consideration as there is a variety of real estate crowdfunding platforms like Fundrise, RealtyMogul, and CrowdStreet to explore. These platforms pool investors' money to invest in real estate projects.

Frequently Asked Questions

What is the best investment strategy?

The "best" strategy for you depends on your individual circumstances. For example:
- If you prefer a hands-off approach with minimal involvement, passive or hands-off investing might be suitable.
- If you're willing to take on more risk for potentially higher returns and have a longer time horizon, growth investing could be appropriate.
- If you seek income from your investments, dividend investing might align with your goals.
- If you're comfortable with fundamental analysis and seeking bargains in the market, value investing might be appealing.

Which investment strategy gives the most returns in the long term?

In the long term, growth investing typically offers the highest returns due to investing in companies with strong growth potential, albeit with higher risk compared to other strategies.
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