Investment strategies

An investment strategy is the secret sauce that sets successful investors apart. 

A good action plan guides our investing decisions. It removes emotion from the process and provides a rational backdrop for assessing investment prospects. 

Planning for success

Most of us, at some point in our lives, have learned the hefty lesson behind Benjamen Franklin's famous quote, 'By failing to prepare, you are preparing to fail'.

It's fair to say that many of us learned that the hard way.

Preparation (research and stock market analysis) and good planning (developing a strategy) are keystones of success, particularly in the world of investing.

Take a look at history's most famous investors. They are notable not just for their success but for the strategies they used to achieve it. They identified strategies, stuck to them through market booms and busts and came out on top. 

Today, legendary investor Warren Buffett is synonymous with value investing. It's just one possible investment strategy you can follow to guide your investing. There are numerous other investment methods available to Australians. 

Top investing strategies for Australians 

An investment strategy is an action plan that helps you choose suitable investments for your financial situation, goals, and risk tolerance. Which approach you choose will depend on your personal preferences and individual circumstances. 

You can also use a combination of strategies to meet your needs. The important thing is to use one (or more) that works for you and follow through with action. 

Your investment strategy will inform the asset allocation in your investment portfolio and how you handle investment risk. 

Below, we'll go through the most common ones and the top analysis methods so you can determine which strategy is right for you. 

1. Income-based investing 

Income-based investing involves making investments in companies that are known for paying dividends. Dividends are profits that companies partly distribute to shareholders.

Companies that pay dividends will likely be more mature and established, with reliable income streams. Shareholders receive additional income when they are paid dividends. They can use this income to meet living expenses or reinvest it to buy more shares that generate even more income in the future. 

Dividend investors seek to maximise investment income. They look for ASX shares with a track record of paying reliable dividends, and revenue flows to support the payment of dividends in the future. 

This strategy provides a return on investment that is not contingent on capital gain. Dividends can provide a good hedge against inflation, especially if they increase over time, and they may provide tax benefits due to franking. 

To learn more, check out our article on income-based investing strategies.

2. Growth investing 

As the name suggests, growth investing focuses on investments with significant growth prospects. These may be start-ups or smaller companies experiencing rapid growth. 

Growth investors look for products and businesses with the potential to cause disruption and change the way things are done. They seek to invest in these types of companies in their early stages, with the expectation they will see strong growth. The investor, in turn, expects to receive a significant return in the form of capital growth. 

Technology shares are the classic example. US company giants like Apple Inc (NASDAQ: AAPL) and Microsoft Corporation (NASDAQ: MSFT) have produced products that radically transformed the market, leading to a shift in consumer behaviour. Growth investors are looking for the next game-changer. 

Finding ASX growth stocks is an active investment strategy involving in-depth analysis. You'll want to look at the financials, growth prospects, and industry standing for any potential growth investments. It can help if you have specialist insight into the industry in which a potential investment operates, as this can allow you to understand its prospects better. 

For more insights, go to our article on growth investing.

3. Value investing 

Value investors look for companies they think are undervalued by the stock market. They anticipate that the stock market will realise the company's intrinsic value sometime in the future, and the share price will increase. 

ASX value shares may not necessarily have explosive growth prospects but should represent a bargain. That way, when market sentiment becomes more buoyant, the value investor can benefit from rising share prices.  

Value investing is also an active investment strategy. You'll need to analyse a company's financial standing and prospects and assess how this stacks up compared to the current share price. 

It can take time and patience to identify value stocks and more time and patience for value shares to realise their potential. But the returns from a quality value stock can be lucrative, meaning this is an investment strategy that can reap rewards.

Our article on value investing will show you how. 

4. Investing in funds 

This strategy involves investing money into a pooled investment vehicle that holds numerous stocks or assets rather than buying each ASX share individually. 

Investing in funds is a quick and easy way to diversify your portfolio and provide opportunities for exposure to different investment themes without having to do all the time-consuming research yourself. 

All sorts of funds are available to ASX investors, each offering different benefits and disadvantages. They include popular platforms such as exchange-traded funds (ETFs) and index funds to listed investment companies (LICs), managed funds and mutual funds.

Read our article on investing in funds for everything you need to know about this investment strategy.

5. Buy-and-hold investing 

Buy-and-hold investors take a position and ride it out. Over time, equity markets typically increase in value, but on a day-to-day basis, they can be volatile. Buy-and-hold investors stick with their investment choices for the long term. 

There are many benefits to holding ASX shares for the long term. Portfolios remain relatively stable over time, and investment fees stay low, avoiding the costs of active management. Investors can also defer taxes on capital gains if they hold assets rather than sell. 

Buy-and-hold investors may also utilise another investment strategy, such as buying value shares, while employing the buy-and-hold strategy. Famous investors, including Warren Buffett, have praised this approach, recognising its ability to deliver healthy long-term returns. 

To learn more, read our in-depth article on long-term investing.

6. ESG investing 

Environmental, social, and corporate governance investing (ESG) incorporates considerations around how businesses impact the natural environment in their operations and how their products and services affect customers' lives. 

Also known as impact investing, ESG investing looks for businesses that are gentle on the planet or at least environmentally and socially responsible. ESG investors want to make a positive impact through their investments and believe ethical investing will also reap financial rewards. 

This investment strategy may involve negative screening, where investors exclude companies that do not align with their values. It can also include positive screening, where investors seek out companies outperforming their peers on ESG factors. 

ESG investing is a reasonably active investment strategy, requiring the investor to conduct appropriate due diligence on investment targets. Our article on ESG investing has more information on this topic.

7. Other investment options

Diversification is one of the most effective ways to protect your investment portfolio. By not putting all your eggs in one basket, you spread the risk and avoid being wiped out if one or two investments fail. 

Diversifying your portfolio means investing in 15 to 25 ASX shares across different market sectors and even geographic locations. 

There are also many different types of investments to add to the mix and diversify further. These include cash, bonds, cryptocurrency, funds, property investment, international shares and more. 

For insights into other investment options, check out our articles on investing in international shares and cryptocurrency.

Critical analysis methods

Investors can use both fundamental and technical analysis to assess the prospects of their potential investments. 

Fundamental analysis examines the financial and economic factors that impact a business to assess its value. 

Technical analysis uses data from a share's price movement to predict its future performance. These are two approaches to assessing share value, and there is much debate about which is preferable. 

Fundamental analysis is grounded in a company's cash flow, with analysts examining financial statements for insights into value. The fundamental approach examines a company's income and balance sheet and attempts to assess the future cash flows an investment in the company will generate. 

Technical analysts believe that all relevant information about a company is reflected in its share price. Instead, they focus on a stock's price movement to discern its future direction. 

To learn more, read our article on stock market analysis styles.

How to choose the best investment strategy for you 

When starting on your investment journey, it is essential to have a plan to guide your actions. Your investing strategy helps you plan the trip.

Which strategy (or strategies) you utilise will depend on your financial circumstances, investment objectives, and attitude to investment risk. It also depends on whether you are interested in active investing or prefer a passive approach. 

Different investment strategies suit different investors and market conditions. Active methods require more input from investors, while passive investing requires less. Regardless of which approach you use, there are some basic investment principles you can follow to optimise your journey: 

1. Choose a suitable investment account: You'll need a brokerage account to buy or sell shares or funds. There are a bunch of online brokers that Australian investors can choose from to handle their trading. Look at account and trading fees to ensure you get the right deal for your plans.

2. Invest consistently: Once you've opened your brokerage account, you'll need to fund it before you can start buying ASX shares. Try to make it a habit to set money aside to invest regularly. This creates momentum, which can supercharge long-term returns.

3. Diversify: Diversification is the practice of investing in different sectors and asset classes and acts as a hedge against volatility. 

4. Have a long-term time horizon: Investing is about setting yourself up for the future, not getting rich quickly. Holding on for the long haul and gradually adding to your portfolio will allow your returns to compound over time.

5. Keep learning: Ensure you understand what you're investing in and which factors may impact its performance. Research companies you are interested in and the industries in which they operate. You can't expect to know everything overnight, but you should work towards expanding your knowledge and wealth over time. 

Foolish takeaway

Ultimately, an investment strategy will only work if we implement it. It can be tempting to delay our investment journey endlessly, waiting until we have more time, money, or both. 

But getting started is an essential part of your investment journey. The earlier you start, the more time you have to allow your returns to compound and build your wealth. Over time, the effects of this can add up – just look at Warren Buffett's example. 

Wherever you are on your investment journey, having an investment strategy can help you reach your financial goals sooner. Choosing an approach that complements your style and aligns with your goals can guide your decision-making, helping smooth the investing process. 

Whether you want to encourage sustainability or take a stake in the latest technology, there is an investment strategy that will work for you. 

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