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Investment Strategies For 2020

July 09, 2020 16:34 UTC

There are many different types of investment strategies out there. Each investor will be suited to different strategies depending on their personality and investment goals. In this article, we will highlight and explain some of the most popular strategies currently available and also discuss what factors you should consider when choosing your own strategy.

Investment Strategies

What Is an Investment Strategy?

Investment strategy is a plan in which you establish the objectives of your investment and the manner in which these will be achieved. This plan will be based on the following parameters, which must be defined before beginning your investment journey:

  • The objective of the investment
  • The time frame to complete the objective
  • Amount of capital you are willing to invest
  • The financial product in which the investment will be made
  • Your risk profile

Having your investment strategy clearly defined before you begin investing in the financial markets will help you minimise your risk. Before we delve into each of the above stages, let's firstly clarify the difference between investment and trading, as is it easy to confuse the two terms.

Investment vs Trading

Both of these terms refer to the exposure of capital in the financial markets, however, there are some key differences between them.

Investment

Generally speaking, investment refers to long-term exposure in the markets. The goal of an investment is maintaining an asset over a longer period of time, sometimes achieving a return on a regular basis. This can be achieved, for example, by earning dividends through shares of a listed company.

The term "investment" tends to refer to stocks or Exchange Traded Funds (ETFs), operating in markets where it is necessary to provide 100% of the investment value. Fundamental analysis is crucial in these opportunities as opposed to constant monitoring of market movements.

Trading

Trading, on the other hand, refers to market speculation in the short/medium-term. The trader speculates on the price of certain financial assets for a quicker return. This practice requires more attention to price data and market trends as traders are constantly seeking opportunities to enter and exit the market. The range of financial products for traders are far broader and it is possible to begin trading with a small percentage of the cost of the desired market position.

In this article, we will focus specifically on investment strategies, although we will also touch on trading as a possible alternative to more traditional types of investment.

Creating a Strategy - Factors to Consider

Regardless of whether we are talking about investment in the longer-term or trading in the shorter-term, the ultimate objective is always the same: to achieve profits from your capital. The methods of achieving this goal, however, will be different as well as the timeframe in which to achieve it.

To create an effective investment strategy, we must first be clear about several factors:

  • Objective
    • What do you want to achieve with your investment?
    • Do you simply want to increase our initial capital through the revaluation of assets in the long-term? Or are you looking for an income which will be paid periodically?
  • Investor Profile
    • Your profile has a lot to do with the risk which you are willing to take in the investment
    • Are you risk averse? Or are you happy to take risks in order to chase bigger returns?
    • One thing which is always important to bear in mind, regardless of your profile, is to never risk more than you can afford to lose
  • Financial products
    • Funds or stock markets? ETFs or bonds?
  • Type of Investment
    • Active or passive?
    • Do you want to constantly keep an eye on your investment and compensate your portfolio as the market changes? Or do you prefer to keep your capital in a product which will continually yield long-term income without constant reviewing?

Once you have been through these questions and you are clear on each one, you can turn your attention to the actual investment strategy.

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Popular Investment Strategies

As we mentioned at the start of the article, there are numerous investment strategies available to investors. You need to choose a strategy which best suits your interests and goals. In this section, we have compiled a list of some of the most popular investment strategies.

1) Fixed Income

The fixed income market consists of investment in bonds (corporate or public), treasury bills, bank deposits and so forth.

These products have a predetermined percentage of returns, which are paid periodically, and also tend to have a maturity date.

Advantage:

  • They are considered low risk

Disadvantage:

  • In return for their low risk, they offer reduced profitability

2) Equities

Equity investment is one of the most traditional forms of investment. Investors purchase shares in a listed company in the hope that they will appreciate in value over a period of time, after which they can sell the shares for a profit. But within this simple approach, we can find strategies in order to get the most out of the investment.

Dividends

This strategy is based on keeping the shares in the stock market long term, in order to collect dividends. Therefore, when analysing which company to invest in, it is important to take into account what their dividend yield is. The dividend yield shows us the value of the previous year's dividend payment as a percentage of the current share price.

Ticker

Name

Sector

Annual Yield

EVR

Evraz

Industrial Metals and Mining

20.29%

IMB

Imperial Brands

Tobacco

12.23%

BP.

BP

Oil, Gas and Coal

10.62%

RDSB

Royal Dutch Shell B

Oil, Gas and Coal

9.94%

RDSA

Royal Dutch Shell A

Oil, Gas and Coal

9.51%

SLA

Standard Life Aberdeen

Investment Banking and Brokerage Services

7.96%

Source: DividendData: FTSE 100 highest dividend yields - 7 July 2020.

Value Investing

Value investing consists of buying shares when they are cheap and selling when they are expensive, a strategy popularised by the legendary investor Warren Buffet. This strategy revolves around finding companies which are undervalued.

In 1962, when Warren Buffet began purchasing shares in Berkshire Hathaway, they cost $7.50 each. At the time of writing this article, one share of this company is worth $271,640.

Buffett's philosophy is not based on constantly buying and selling shares, but buying shares, keeping them and limiting himself to acquiring shares in no more than 8 or 9 companies a year. Another part of his philosophy is to take into account that companies which pay good dividends represent great opportunities to maximise the profitability of your investment.

Advantages of investing in equities:

  • You are a part-owner of the company, which means, among other things, you have voting rights
  • If the company pays dividends, you will get a regular income - and the possibility of capital increases too.

Disadvantages:

  • You need to pay 100% of the investment
  • The company could fail or go bankrupt

3) Dogs of the Dow

This is one of the easiest investment strategies to understand. Popularised in 1992 by Michael B. O'Higgins in his book "Beating the Dow", this strategy involves choosing the stocks with the highest annual dividend yield from the Dow Jones 30.

The Dogs of the Dow investment strategy follows these steps:

  1. At the beginning of the year, identify the 10 Dow Jones shares with the highest dividend yield
  2. Divide your available capital in ten equal parts
  3. Each portion will be used to buy shares in each of the ten identified companies
  4. Keep this basket of shares until the end of the year
  5. At the end of the year, sell the shares and repeat the process

This strategy has proven to be very effective over the past few years, but with a few exceptions. For example, in 2016, the basket of stocks achieved a return of 20% compared to 17% for the entire Dow Jones 30. In 2017, however, the basket of stocks underperformed the index by 19% compared to 25%. Even so, this is one of the few exceptions that can be found in recent years.

Below you can see the list of the Dogs of the Dow for 2020:


Ticker

Name

Dividend Yield

1

IBM

International Business Machines Corporation

5.50%

2

DOW

Dow

5.10%

3

XOM

Exxon Mobil Corporation

4.80%

4

VZ

Verizon Communications

4.30%

5

CVX

Chevron Corporation

4.10%

6

MMM

3M

3.40%

7

PFE

Pfizer

3.30%

8

KO

Coca Cola

3.30%

9

WBA

Walgreens Boots Alliance

3.10%

10

CSCO

Cisco Systems

3.00%

Source: Admiral Markets

Advantages:

  • It does not require much knowledge of the market
  • It only requires action at the beginning of each year

Disadvantages:

  • As with any investment, there is a risk of the market moving against you

This can be a good strategy for novice traders to begin their journey in the stock market. You can practice this strategy, and others, in a risk-free environment with a demo account from Admiral Markets! Simply click the banner below to open a demo account:

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4) Dollar Cost Averaging

The Dollar Cost Averaging investment strategy is another method suitable for a beginner investor. It involves investing a fixed amount of money on a given asset, usually stocks or bonds, on a regular basis. Normally, this operation takes place every month, always with the same amount of money, regardless of how the markets are behaving.

The strategy relies on the fact that the stock market tends to go up over long periods of time, even if it is subject to ups and downs in the shorter term. Dollar Cost Averaging avoids the timing risk involved in those short term price fluctuations - by investing the same amount each month, you simply buy more shares for your money when the price dips, lowering the overall average cost of your shares.This is why it is important to be consistent and not to give up after a few months if you do not get a return.

Although this strategy is generally practiced with stocks or bonds, it can become much more effective if we use it with ETFs. Why is that? ETFs are a type of security that track a basket of other securities, like shares or bonds, that together usually represent a specific sector or economy. Therefore, using this strategy with ETFs ensures that your portfolio is diversified and you do not find yourself relying on a single type of stock rising in the future, because it may not.

But let's look at an example of Dollar Cost Averaging with stocks, because they are easier to understand.

An investor invests $500 into purchasing shares from Company X every month for 5 months:

Month

Capital

Shares Price

Shares Purchased

Accumulative Share Total

January

$500

$100

5

5

February

$500

$105

4.76

9.76

March

$500

$95

5.26

15.02

April

$500

$90

5.55

20.52

May

$500

$110

4.54

25.06

In our example, with this strategy the investor has ended the 5 month period with 25.06 shares of Company X, purchased for a total of $2,500. Therefore, the average share price over the 5 months was $99.76, while the shares closed at a price of 110 last month. In this example, the investors position is worth $2,756.60 at the end of the 5 months. Thanks to this strategy, the investor has made a profit of $256.60, despite the fact that the share price did fall in value two months in a row.

If the investor had not followed the strategy and invested $2,500 all in one go in January, he would have bought 25 shares at $100 per share, instead of ending the 5 months with 25.06 shares at an average price of $99.76. Or worse, he could have bought in February, with at $105 per share. Thus you can see that dollar cost averaging helps you to avoid the timing risk caused by the short-term ups and downs of the market.

Please note that this example is purely for illustrative purposes, the market could have just as likely gone against our investor over the 5 month period.

Advantages:

  • Your emotions are left out of the strategy
  • You do not require a large amount of start up capital

Disadvantages:

  • Requires consistency and confidence in the plan

5) Growth investing

Growth investing is a strategy that involves purchasing shares in companies with rapid growth potential, such as technology startups. These companies are usually overvalued in relation to their book value, making this strategy the opposite to value investing.

To know if a company is overvalued, we must look at the company's Price Earning Ratio (PER), which demonstrates the ratio of the company's share price to the company's Earnings per Share (EPS). The higher the PER, the more overvalued the stock is and vice versa.

Advantage:

  • If it works, this strategy can offer high returns

Disadvantage:

  • The risk of growth investing is higher than previous strategies we have covered. This is because the company in question could not meet its high expectations and fall in the stock market. This happened, for example, with Snapchat, whose share price shot up in its first few months on the stock market, however, quickly lost its value when other applications such as Instagram replicated its features

6) Momentum Investment Strategy

This strategy is one of the most popular on our list. It consists of investing in assets which are already on a consistent upward trend, taking advantage of the existing momentum.

It requires constant review in order to be able to act in case the upward trend is interrupted. In this strategy, you must pay close attention to the technical analysis, as opposed to fundamentals. If this strategy is used with stocks, we recommend diversifying so as to not put all your eggs in one basket.

In reality, this strategy is more reminiscent of trading than investing, as the investor may have to open and close trades in shorter periods of time compared to traditional investment strategies.

Advantage:

  • If the movement is prolonged over time, it offers the possibility of high returns.

Disadvantages:

  • Constant attention is required
  • Stress and emotions can easily lead to mistakes

7) Green Investment

Green investment is focused on companies that promote clean energy resources and environmentally responsible practices.

We can talk about two general types of green investments:

  • Direct green investments. These are investments whose profits are obtained directly from companies devoted to environmentally friendly activities.
  • Indirect investments. The capital that the trader invests is directed to companies whose main business is not devoted to sustainable practices but which has a product line, or a project directed to green activities.

This type of investment can be made either by buying shares in companies or through specialised green ETFs.

Advantages:

  • It is a sector with great growth potential

Disadvantages:

  • Requires thorough analysis of assets
  • It is highly focused and should be diversified with other investments

Trading

Those who prefer to operate in shorter periods of time can opt for trading. This involves speculating on the price of an asset and buying or selling, according to the movement of the market, in an attempt to make a profit.

There are several different trading styles depending on the period of time we use. Scalpers trade in a very short period of time, holding positions for minutes and sometimes even seconds. Day traders operate in a slightly longer period of time, holding their position open and closing within the same day. Whereas, Swing Traders tend to hold positions open over several days.

In comparison to investors, traders benefit from a wider range of financial products at their disposal. As well as stocks and ETFs, they can choose derivative products such as Contracts for Difference (CFDs).

CFDs track the value of an underlying asset, allowing traders to profit from both rising and falling markets, without ever actually owning the asset in question. It involves entering into a contract with your broker in which you agree to trade the difference in price of the asset when the contract ends. CFDs also benefit from leverage, meaning you are not required to pay 100% of the position, unlike with shares or ETFs.

If you want to start trading stocks, CFDs or many other products, you can click on the banner below and open an account:

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About Admiral Markets

Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.