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18 investing strategies all investors should know about

Investing in stocks or similar types of financial assets can help to build wealth by generating both short-term and long-term returns. There are many different investing strategies, making it a matter of finding the right one that will help to get you started or improve your approach.

Whether you have begun your investment journey already or you’re only just starting out, there are various strategies that will fit nearly all types of investing styles. Keep reading to learn about 18 different investment strategies, each with a different set of characteristics that will appeal to a wide array of personality types.

List of investment strategies

Historically, one of the best ways to accumulate wealth has been through investing in the stock market for long-term returns. Long-term average returns have been shown to outpace real estate, commodities, bonds, and savings accounts. According to US investment bank Goldman Sachs, 10-year stock market returns have averaged 9.2% over the past 140 years. Yet, while investing can be a good option, there are many ways to do it, and no particular method will be right for everyone. With that in mind, as you read through these investing strategies, consider which ones resonate the most with you.

Active vs passive investing

A passive investment strategy is one where there is little to no interference in the portfolio. It is strictly a buy-and-hold investment approach, and the investor may not even monitor what is happening with the portfolio. Passive investors often make automated contributions to a fund or account.

Active investors like to monitor their holdings and may buy and sell their holdings based on a strategy (like some of the ones discussed below). They like being involved and will have more trading activity (buying and selling) than a passive investor.

Passive investors tend to buy investments that track an index, such as a mutual fund or exchange-traded fund. If they buy individual stocks, they intend to hold them for many years. Active investors may buy index ETFs but may also invest in or trade in and out of individual stocks.

Top-down vs bottom-up investing

A top-down investing style looks at the big picture, while a bottom-up investing approach looks at how a specific stock is doing and decides if it is a good buy. One method isn’t better than the other, but one approach may appeal to you more.

Top-down investors look at macroeconomics​, how the economy is performing and how that may affect the stock indexes. If their analysis reveals that the economy is healthy, they may buy into index funds or continue digging to find stocks that are likely to benefit from the economic environment.

Bottom-up investors may be less concerned with wider economic factors. They spend most of their time researching individual stocks, trying to find stocks that are undervalued or poised for growth.

Value investing

A value investing​ strategy involves analysing a company’s financials to assess whether the current valuation of the stock is a bargain or not. Value investors focus on paying a low or fair price for a stock. ‘Cheap’ has nothing to do with the stock price. It means whether the stock price is fair relative to the financial situation of the company.

  • Absolute value investing uses a dividend discount model or free cash flow model to assess the fair value of a stock. If the stock price is near or below that price, the absolute value investor may consider purchasing that stock. If the price of the stock rises to above their fair value calculation and purchase price, they may make a profit.

  • Relative value investors look at historical information to assess whether a stock is under or overvalued compared to how it has traded in the past. For example, if a stock price has typically fluctuated between a 20 and 40 price-earnings (P/E) ratio​, the investor may consider buying it when the P/E is nearer to 20. P/E is just one example of a metric that can be used. Relative investing also tries to assess if a stock is good value relative to the company’s peers. Regardless of the metric, relative value investors try to purchase a stock when it is priced ‘cheaply’ based on that metric.

Growth investing

A growth investing strategy involves focusing research efforts on companies that are growing, or are expected to grow, over the next year or more (growth stocks​).

This may include newer companies that may still be losing money but are reducing losses or expected to become profitable and keep growing. Growth investing may also include looking at stocks that have already seen steady growth over the last few years and buying those stocks based on the expectation that the growth will continue.

Some growth investors may also buy stocks based on analyst estimates for future growth, focusing on stocks that are expected to achieve high growth over the next one, two or several years. Growth is typically looked at in terms of revenue/sales and earnings per share (EPS).

Investing in companies you know well

Peter Lynch, the famed Wall Street fund manager, said: “The worst thing you can do is invest in companies you know nothing about.” Similarly, Warren Buffett said: “Invest in what you know… and nothing more.”

The idea is that if you really like a product or service, the chances are that others will as well, and the company related to that product will prosper. For example, if you visit a store regularly and it’s always busy, that may be a good sign. However, regardless of whether you like a store, if it’s empty all the time, that may be a warning sign for an investor to think again.

Every day, we receive clues about how products and services are performing and whether they are liked by others. But many people forget that many of these products and services are tied to a publicly traded company.

The bottom line: consider buying into companies that you use and that you can see are doing well.

Income/dividend investing

The income investing strategy is centred on dividend stocks​. Some companies pay regular dividends, or cash payments, to shareholders. These are typically well-established companies with a profitable business, but growth is expected to be minimal.

Small companies that are still growing don’t typically pay dividends because they need that cash to expand their business.

Some investors prefer buying dividend stocks where the company has regularly increased the dividend. While the dividend yield (dividend per share/market price per share) may be small or average when first purchasing the stock, over time, as the dividend grows, the dividends alone can produce a very attractive yearly return.

Other investors focus solely on dividend investing​​, trying to buy stocks that offer attractive or high-dividend yields. For example, this could occur after the stock price has fallen. Use caution with this approach, as sometimes there is good reason a stock’s price has fallen. And if a company is struggling, they will often cut the dividend, taking away the high yield and reason for owning the stock.

Socially responsible or ESG investing

A socially responsible investing strategy only buys stocks in companies that are ethical, have social values, care about the planet and people, and/or work towards environmental sustainability.

Socially responsible investors target companies that are doing well in the hope of making money on that investment. Yet, that company must also be socially responsible. In this way, investing isn’t only about making money but also supporting companies that are trying to have a positive impact.

Social responsibility can take on several forms, such as environmental, social, and corporate governance (ESG). Companies that try to do good for the environment are classed as environmentally responsible, so, for example, they may be trying to reduce carbon emissions and humanity’s negative impact on the planet. Companies that try to improve the lives of people are socially responsible. And then, there are companies who treat their staff well, have a positive work culture and values, and are transparent. These fall under the governance lens.

Therefore, socially responsible investing is not only about picking companies that could do well but also about investing in stocks that align with our personal values. Read more about ethical and sustainable shares​.

Factor investing

A factor investing strategy​ is one centred around a metric, such as value, already covered above. Other possible factors include minimising volatility, quality, momentum, and company size. Factor investors decide on what they want to focus on, possibly including more than one factor, then create a portfolio designed to invest in assert that are highly exposed or moved by those factors.

For example, an investor may decide they want to focus on value stocks and keep volatility low. This might require only including stocks at a fair price, and that have low betas​ (a measure of volatility) in the portfolio.

There are several different types of factor ETFs, including low volatility, income/dividend, high volatility or leveraged, momentum, small and large-cap, and growth ETFs, to name a few.

Momentum investing

A momentum investing strategy is centred around technical analysis, as opposed to fundamental analysis. Momentum investors focus on the price movement of a stock as the basis for investing. Momentum investing ties into trend trading, in that momentum investors want to buy into stocks that are moving higher, but then exit when that momentum fades or reverses to the downside.

This approach can be made on different time frames to control how frequently trades are made. Monitoring momentum on a daily chart will result in more trades than monitoring momentum on a weekly or monthly chart.

Stocks with greater upside momentum are favoured over stocks with little (moving up slowly) or no upside momentum (moving sideways).

Momentum trading​ is an active trading strategy, as opposed to a passive one.

Contrarian investing

A contrarian investing strategy can take on many forms, but the general theme is that the investor does things that are against consensus. This is because when most people agree on a direction, such as up, that is when the trend often changes direction and heads lower.

Some examples of contrarian strategies or tactics include moving into safe-haven assets​ when everyone else is euphoric about the stock market. If everyone already owns a stock, the contrarian says, “Who’s left to buy and keep pushing prices up?”. A more aggressive tactic is to short stocks that people are bullish about, but that are trading well above their fair value.

Contrarian investors may also catch the falling knife, buying distressed assets that no one wants, knowing that panic selling may have pushed the asset’s value down too far and prices may return to the mean.

With all investing, risk-management is important, but especially with contrarian investing since the contrarian is often going against the current price trend. Some contrarian investors wait until the price turns in their expected direction before jumping in.

Read more about this in our risk-management guide​.

Small-cap investing

The small-cap investing strategy is centred around buying stocks in small companies, since these tend to have higher growth potential than already-large companies. Finding out which companies are likely to grow into large companies is the challenge. This is where some of the other investment methods can help, such as growth investing.

Whether it’s a small or large company, growth investors may want to see the evidence that a company is growing. This could come from increasing sales or EPS, or preferably both. Most small companies stay small, and some may fail. Therefore, investors tend to have an exit plan for if the stock/company doesn’t grow as expected and diversify capital across multiple small-cap stocks, rather than just one or two.

IPO investing

IPO (initial public offering) investors like getting in on the ground floor. They purchase new companies when they are first listed on a major exchange. IPO stocks can be volatile, often having large price swings in the first few months, but especially within the first few days.

Since an IPO involves new stocks, there will be limited existing information on it, so investors review what’s provided in the prospectus (details about the company and its financial history) and additional information they may have on how the company’s industry is doing and potential demand for the company’s product or service.

See a list of upcoming and recent IPOs​ to invest in.

Diversified investing

A diversified investment strategy seeks to eliminate the risk associated with any single investment. This is accomplished through gaining exposure to many stocks and assets, often through ETFs or index funds.

ETFs or index funds are an efficient way to diversify, since each one contains multiple stocks or assets, and there are funds for different asset classes (commodities, stocks, currencies, real estate) and different global locations.

With a diversified portfolio​, how any single asset performs doesn’t matter. Rather, a diversified portfolio does best when overall conditions are favourable, and asset prices are rising as a group.

Alternative investing

An alternative investing approach may include traditional assets like stocks, bonds and precious metals but can also include investing in real estate, credit, or non-traditional assets like art, farmland and fine wines. It also includes investing in businesses that use non-traditional investing approaches like leverage, short selling, or the alternative assets mentioned. Such businesses include hedge funds.

Alternative investing moves away from traditional portfolio construction and implements other income streams to help diversify returns. Alternative investment returns may not be correlated to traditional assets like stocks or bonds. And some alternative investments may even rise or maintain value when traditional assets fall, which can help offset losses in poor stock market/economic conditions.

Broker or investing guru recommendations

This strategy piggybacks off successful investors, buying what they are buying and selling what they are selling. The investor will usually explain the reasoning behind their investment, how it may turn out, what next steps to take, and why it could be beneficial (or risky). Therefore, the investor that is looking for recommendations will have enough information to make a decision about their own trade.

Most investors following this approach pick between one and three experts to follow at a time. It can be hard to juggle too many trades and potentially conflicting opinions if following too many experts. Consider who you are following and what their track record is.

Copy investing

Copy investing is following the trades of a successful investor, often a hedge fund. The reason for the trade is often unknown, as you instead choose to blindly follow the investor’s steps without knowing what the outcome will be. This is what differs this strategy from investing based on recommendations, as explained above, which is a more informed strategy. However, it is important to trust the source and track record of the entity providing the trades.

The buy and sell positions of major hedge funds are published publicly in what’s known as 13F filings, along with the hedge fund’s performance, on sites like Holdings Channel and WhaleWisdom. One high profile fund manager to keep an eye on could be Kathy Wood’s ARK Invest, whose innovation ETFs publish their trades daily on the Kath’s Ark website.

Investing in innovation

Innovation investors look for companies that offer cutting-edge technology or services that many people or businesses will soon want. An investment in innovation strategy is more about visualising the future and seeing what people and businesses will need and desire, as opposed to looking at the past.

Amazon and Tesla are examples of innovators, as are companies like PayPal, Square, and Etsy. They created something innovative, and there was a demand for it. But innovation is always changing, and there are always new innovators.

Innovation investors may buy these companies early or jump into these stocks once society is starting to realise their value and their stock price and earnings/sales are starting to reflect that.

Thematic investing

Thematic investors​ buy and sell investment themes. For example, if they believe that electric car stocks will be hot for the next several years, they invest in this theme by buying electric car stocks. They can also do the same for other popular investment themes, such as 5G, automation and robotics, cybersecurity, and big tech.

Explore our thematic baskets

Themes including Driverless Cars, Big Tech, Automation & Robotics, and more

View our share baskets

How to pick an investing strategy

It is often easier to do something well when you enjoy it. Pick an approach you enjoy that suits your personality and risk tolerance.

If you don’t enjoy investing at all, but think it may be a good way to potentially earn money, then you could pick a passive approach and buy index funds at regular intervals.

If you prefer to be more active, consider an active strategy centred around what you enjoy or your core personality traits. Some people love being a contrarian, while others prefer following trends. Others prefer thinking about the future and what companies may do going forward, while others like to look to the past to verify how a company has performed.

There is no right or wrong in terms of choosing an investment strategy, but what is important is choosing a strategy (or possibly merging several) and then coming up with a plan for how to implement it. This plan could include why and when you will buy, why and when you will sell, risk-management protocols, asset allocation, and how and when to rebalance your portfolio.

The importance of market cycles in investing

Understanding the market cycle can help bolster returns for those interested in adding this knowledge to their investment strategy.

The market cycle usually occurs over five to 10 years and is the up and down movement of stock indexes, such as the S&P 500.

  1. Let’s start with when the markets are in decline. Prices fall from prior levels and continue to move lower for several months to a year or more. Things look grim, and there is lots of talk of how stocks are risky investments. When there is so much pessimism, stocks prices tend to bottom out because if everyone dislikes stocks then there is no one left to keep selling to.
  2. Then, prices start to rise. Uptrends, or bull markets, often last two to 10 years, with the average being about three years before a correction, usually 20% or more.
  3. Downtrends, also known as bear markets, will affect major indexes for an average amount of time of about 10 months, but any single correction could be longer or shorter in duration. A bear market is often considered a decline of 20% or more from the prior peak.
  4. Once the sell-off has occurred, the cycle repeats with an uptrend followed by a downtrend.

By understanding the cycle, investors can learn not to panic during declines. Or alternatively, they may lighten their holdings on declines but then buy back aggressively once prices start turning back up, taking advantage of the upcoming bullish section of the cycle.

FAQs

What are some investing rules?

Some useful investing rules to consider include: diversify, make regular contributions, start investing early, buy low-cost index funds, only make investments that allow you to sleep at night, and rebalance your portfolio​ if it no longer aligns with your objectives.

What are the main types of investments?

Some of the most common types of investments include stocks, exchange-traded funds​ (ETFs), stocks and shares ISAs, and mutual funds.

What are the most advanced investing strategies?

Some strategies use algorithms and computer models to try to predict how a stock index or stock price may move in the future. Yet, advanced investing strategies aren’t necessarily better. Some of the simple strategies discussed in this article can work as well as advanced models. Most hedge funds, who have access to sophisticated tools, can’t beat the yearly return of passive index funds.


CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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