What Are Different Investing Strategies? - SmartAsset (2024)

An investment strategy is a defined approach to investing that shapes the choices an investor makes for his or her portfolio.Different investment strategies assume specific tactics based on fundamental beliefs. For instance, value investing seeks stocks that are undervalued and are selling for less than their true worth, whereas growth investing aims to find investment opportunities in companies that have a high potential for growth. This guide will break down the major investment strategies and help you decide which of them is likely to be a good choice for you. You can also work with a financial advisor to help create the right asset allocation for your portfolio.

How to Choose an Investment Strategy

There are a number of factors that go into choosing the investment strategy that will work best for you. One thing is to think about whether you want to choose an active or passive investing strategy. Active investing involves the frequent buying and selling of stocks. It requires hands-on management, often by a portfolio manager who can delve into various factors to forecast the market.

Passive strategies, on the other hand, are focused on buying and holding investments for the long haul. Proponents of passive strategies argue this cuts down on trading costs and increases tax efficiency. It also tends to be less risky than market-timing strategies, which can reap big rewards by trying to beat the market but also suffer big losses. Oftentimes, portfolios will blend active and passive investing.

Other factors you need to consider are your time horizon, such as how close you are to major life events like buying a house, having children or retiring. If you need income soon, you may not want to select long-term investments, for instance. Your risk tolerance is another consideration. Generally, you can tolerate more risk early in your career, and desire less risky, more stable investments as you move toward retirement. A strategy like income investing, which is based on generating a steady income, might be less risky than a more subjective strategy like value investing.

1. Growth Investing

Growth investing is an investment strategy that focuses on building capital through buying equities that have the potential to increase in value. This is most commonly found in stocks where investors believe the value of the company, and thus the value of the shares they’ve purchased, is likely to go up.

Growth investing contains several sub-strategies. Two of the most common are short-term investments and long-term investments. Short-term generally means buying stocks and holding them for less than a year. Investors use short-term growth investments when they think a company’s value is likely to shoot up quickly. Long-term investments, on the other hand, are held for more than a year. Investors use these when they believe the company’s value will grow slowly and steadily over the years.

Growth investing can touch on numerous sectors, such as:

2. Value Investing

Value investing, an investment strategy championed by Warren Buffett, focuses on seeking out stocks that you believe are intrinsically undervalued. By finding companies the market does not properly value, investors have the potential to post big gains when the market eventually corrects and the company becomes valued properly. This is a very subjective type of investing.

3. Income Investing

Income investing focuses on generating a steady income from your investments. Rather than seeking stocks that will grow in value and give your portfolio more hypothetical value but make you no richer in terms of cash, income investing wants to find investments where your portfolio sees real-world value in the form of money in your pocket.

Income investments generally take two forms. The first is stocks that pay dividends. Some companies pay their investors a percentage of profits in the form of a dividend. That is cash that goes into your account if you own stock. The other investment common to income investing is bonds, which pay out on a consistent basis.

4. Socially Responsible Investing

The previous investment strategies focus more so on how an investor makes money. This investing strategy is a bit different in that it takes a broader look at how your investment can impact the world at large, beyond your portfolio.

You can tailor a socially responsible investing strategy to what you personally care about when it comes to social responsibility. If you are an environmentalist, for instance, you might invest heavily in green companies and avoid investing in companies that deal in fossil fuels. If you care about foreign policy, you might avoid companies that do business in certain countries.

Halal investing — investing done following Islamic principles — is another form of socially conscious investing. This means, among other things, not investing in companies that deal in alcohol, gambling or pork products.

5. Small Cap Investing

Small cap investing focuses on companies with a market cap — that is total value — between $250 million and $2 billion. This means you don’t invest in the companies that many investors focus on (think Apple, Ford, IBM, etc.) and instead in smaller companies you think could do well in the future.

Small cap companies often have few shares available for public purchase. Because institutional investors generally don’t want to own too big of a percentage of a company, they might shy away from the companies, giving individual investors a leg up.

6. Buy-and-Hold Investing

A buy-and-hold investment strategy involves finding investments that are likely to perform well over several years. Even when the market dips this strategy employs the mentality of staying the course and believing that the investments will have a positive return over the long haul. If this is the strategy for you then you’ll be less worried about the short-term impact on the market as the belief is that the market performs well over a period of several years.

7. Active Investing

Active investing is much different than buy-and-hold as it focuses on riding the ebbs and flows of the market, making much. more frequent trades. It can be very difficult to analyze the market effectively and active investors use a number of strategies to do just that. They focus on anything from trading based on events to setting up daily technical analysis to find potential quick returns.

The Bottom Line

There is no easy way to pick which investing strategy you should choose when building your own portfolio. You might end up with a mix of sorts as you find that the right strategy for you involves multiple types of investment strategies. The best way to pick an investing strategy is to think about your financial and personal goals. Then figure out which strategy is most likely to help you achieve those goals. You can also enlist the help of a financial advisor.

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