To the novice investor, the stock market can be a bewildering place. There are hundreds of different companies out there, in multiple industries. And with every company issuing a continuous stream of corporate news and accounts, there is a real danger of “information overload”.
However, applying a clear investment objective and philosophy can help you make better investment decisions. The information overload is curtailed as the number of investment possibilities is significantly reduced.
Let’s look at some of the most popular investment strategies in the UK.
What is an investment strategy?
Simply put, an investment strategy is what guides an investor’s decisions based on their goals, risk appetite, and future monetary needs.
You need a strategy to help you decide which stocks to buy. A strategy can prevent you from losing lots of money by buying shares on a whim without a plan in place. Forming a set of sensible guidelines and having the discipline to stick to them should keep you involved in more suitable investments.
Whether it’s considering companies of a certain industry, or keeping to companies that exhibit certain financial criteria, sticking with what you know best and feel comfortable with should limit investing disasters.
Types of investment strategies in the UK
There are many different investment strategies for you to choose from in the UK, just as there are a lot of different investment types to select from.
Here are some of the most popular investment strategies:
- Value investing
- Growth investing
- Dividend investing
- Pound-cost averaging investing
- Top-down investing
- Off the chart investing
- Contrarian investing
- Impact investing
Let’s look at each one individually.
Value investing is a popular strategy that can work well for a lot of people.
Simply speaking, value investors buy shares when they appear cheap. This is measured by a few financial ratios such as the price-to-earnings ratio (P/E) and yield. The shares are sold once they become more expensive.
The difficult part for beginners is knowing when to buy and sell. Value investors tend to be guided by the financial data to help make good decisions.
Growth investing aims to profit from firms that grow at a faster rate than their industry or the overall market.
Investing in growth stocks can give higher returns over the long run, as they are expected to grow at a faster rate than the market’s average.
Traditionally, growth stocks perform better when the economy is performing well, whereas value stocks tend to outperform in recessions or bear markets.
Dividend investing is a simple investment strategy. Simply put, you buy individual stocks that pay regular dividends so you can profit from the dividends.
Dividends can give you a regular income stream from your investments. This is separate from any growth in the market value of the stocks you buy. This can help you make money even if there are negative market movements.
Pound-cost averaging investing
This UK investment strategy refers to investing small sums of money at regular intervals, regardless of what’s going on in the market.
This can be a good strategy for anyone wanting to take the emotions out of investing. It helps you overcome the emotional highs and lows because you invest the same amount without worrying about the state of the market.
This investment strategy is often called sector investing. Simply put, you focus on one specific market sector or asset class and try and learn as much about it as you can.
Through this, you can identify a sector that you think will benefit from a major trend, and then pick the best companies within that sector. For example, a lot of people moved to healthcare stocks at the start of the Covid-19 pandemic.
Another option is to focus on a specific type of investments, like stocks from emerging markets, for example. These can be favoured by investors as they are often thought to have significant growth potential compared with developed markets.
Off the chart investing
‘Off the chart’ is not always a good strategy. It can be very unreliable.
This strategy uses price charts and other technical data, like the volume of shares traded, to predict what will happen in the future and make an investment decision based on this data.
Some people do like this strategy, but it can be hard to make it work with shares. You may end up buying and selling too frequently, hence racking up expenses that eat into your returns.
Contrarian investing involves going against all the current market trends in the hope of making profits. This idea comes from the school of thought that markets are subject to a ‘herd mentality’ created by fear and greed. This makes markets over- and under-priced at different times.
A contrarian investor looks to buy stocks that are currently priced below their intrinsic value.
This can be a rewarding investment strategy, but it is also risky and can take a long time to pay off. If you have a low risk tolerance this may not be the best strategy for you.
You also need to spend a lot of time researching stocks to find the opportunities if you are to be a successful contrarian investor.
Impact investing is when you invest to have an impact — not just for financial returns. This impact is usually focused on environmental and/or social causes.
This is a good investment approach if you have strong moral or ethical views and want to translate them into your investments.
How to choose the best investment strategy for you
As you can see, there are a range of investment strategies out there. There is no one investment strategy that suits everyone or that will be right for your investment portfolio.
With any strategy, there will be a certain amount of investment risk associated. So, remember to invest for the long term and try not to invest any money you will likely need in the next five years or so.
A good strategy is one that works for you by playing to your strengths and eliminating your weaknesses. For example, if you’re good with numbers, then a strategy that focusses on detailed analysis of company accounts may suit you.
A good strategy should also be simple to follow, easy to summarise, and tell you when to buy and when to sell. Of course, it should also be based on sound investment logic.
Finding the strategy that works best for you is likely to involve some trial and error. You’ll probably have to experiment with a few different ones before you work out which is best for you.
You’ll also notice that when the stock market is rising, most strategies do well. That’s why it’s a good idea to benchmark your performance against the overall market.
This way you can see if all your effort was worthwhile, and it can help you make sure you don’t mistakenly attribute your investment success to skill rather than luck.