What are investment strategies?
Investment strategies guides an investor on how to reach their investment goals, handle risks, and make future investments to grow capital. Investment strategies include seeking higher capital appreciation investment goals, that follow high-risk and some low-risk investments for wealth protection goals.
Graham’s Five Investment Strategies:
Benjamin Graham, in his book, “The Intelligent Investor” suggested five strategies for investing in stocks.
- General Trading: Where the investor participates in market research and buy dollar-cost averaging stocks.
- Selective Trading: Picking up stocks that can do well in the markets for a short-term period.
- Buy Cheap and Sell High: The investors enter the market when the price of stocks are low and buy them, and sell it when the market price reaches high.
- Long-pull Selection: Selecting the stocks which expect to grow quicker when compared to those that stick for a long time.
- Bargain Purchase: By some techniques, the measure true value shows high but priced below it, purchase that stocks.
Risk is a major component of investment strategies. Your goals should be as unique as you are. Your investment strategies must include:
- Where you are headed
- What you are planning to do to get there
- What your specific objectives are
- When you want to achieve them
- What level of risk you’re willing to undergo to reach your goals.
Risk Tolerance
What is risk tolerance? Understanding it can help investors to diversify their portfolios. How can an investor calculate his/her risk tolerance? Risk tolerance is often discussed but rarely defined. If the investors understands and calculates the risk tolerance, they can go for long-run benefits.
Risk tolerance by Time Frame
Risk tolerance often reflects age and time, as younger people can have a longer time horizon, and can take more risks in their investment. They are likely to invest in stocks and stock funds rather than fixed incomes. The same logic applies with older age, having short investment horizon and low-risk tolerance, especially when they are retired and go for fixed income.
Risk Capital
Investors with higher net worth and more liquid capital can afford greater risk tolerance when compared to one with low net worth and limited risk capital. Risk capital is the money available to invest and trade and will not affect your lifestyle even when removed. The more risk capital you have makes you more risk tolerance.
Note: As you have more risk capitals and can make riskier bets, that doesn’t mean you have to do it; it’s wiser to prevent your capitals as goals, and if you’re newer to investing be wary of taking many risks.
Investment Horizon
What is an Investment Horizon? The total length of time an investor holds their portfolio is described as an investment horizon. It is generally related to the amount of risk an investor is willing to take. Investment horizon ranges from short-term periods to long-term horizon, according to investor potential. Some trading strategies can employ investment horizon of days, hours, or even for minutes, especially for those based on technical analysis. The investment horizon length often determines the risk tolerance of an investor.
