Everyone is in the financial market to make money - the more, the better. There are, in fact, many options to that end. Below, we’ll be citing an overview of your choices. While the most profitable approach is highly contested and subject to heavy debate, the basic premise of an investment strategy is simple: rule out emotions.
Emotion is the bane of every reasonable trader as it is not reproducible. A plan seen through can be fine-tuned and modified for future improvement. Entering and exiting investments based on unquantifiable factors, such as emotion, cannot.
So what do you do if you wish to succeed in the market in the long run? Have an investment strategy.
What do we mean by an Investment Strategy?
The term investment strategy refers to a set of guiding principles and practices specifically designed to help individual investors attain financial and investment goals.
They guide an investor’s selection for their investment portfolio based on different profit objectives and investment horizons. Investors with a longer time horizon, for example, may opt for a conservative investment strategy where risk is reduced but growth is minimal.
A point of interest here is that while the overarching philosophy of these investment strategies may be set, specific details, such as take-profit levels or cut loss prices, are constantly subject to revision.
Why do we invest?
The goal of an investment is to generate income through appreciation. When we purchase a stock, we do so in the hopes of its value increasing over time. When an individual purchases a good as an investment, the intent is not to consume the good without any gain. An individual who invests looks to purchase goods and assets to create wealth.
By official definition, an investment is an action or process of investing money for profit. However, an investment does not always require investing money. An investment could also come in the form of time, effort, or an asset. For example, you can invest time or effort to help your business grow. On a personal level, you could invest fiscal money in the stock market to either generate consistent income for the future or to sell later at a higher price.
Ideally, an investment made in the stock market is used to generate income without the need for further effort or participation - thus creating passive income. Though we may use the colloquial definition of passive income in this sense, we believe this covers the essence of stock market investment: that we invest money today so that we may not need to work tomorrow.
Considerations To Make Before Investing
There are dozens of available investment strategies to utilize, though not all may be right for you. Three important considerations to mull over are your investment goals, how much you can invest, and how much time you have available to manage your portfolio.
Each of these considerations plays a huge role in the investment strategy that you may opt for. Someone with high-arching investment goals but a smaller starting capital, for example, will need to take on more speculative investments whereas someone whose primary goal is wealth protection may look for a passive investing strategy.
Ensure that you account for your research time as well. If your daytime activities focus on building a career with little time left for investment research, you may look towards fund management or a simple buy-and-hold strategy to minimize the need for active participation within the markets.
5 Types of Investment Strategies
As we mentioned in the introduction, investment strategies range from conservative to highly aggressive. Let’s go over some of the highly-touted investment strategies of today.
When you wish to buy an asset once and leave it for an extended period, look towards passive investing. Also known as a “buy and hold” strategy, its foundational objective is to maximize gains while minimizing the buying and selling of assets. Thus, a passive investor looks to hold a security for the long term with the firm ideology that the market posts positive returns over time.
On the other hand, we have active investing which is an investment strategy that involves the process of maximizing gains by actively buying and selling assets with specific characteristics. The goal is to beat the results of the indices and the general financial market by building a portfolio of investments that generate great income.
Value Investing is an investment strategy that involves picking an asset that appears to be trading for less than the outlined intrinsic or book value. The core principle is to ferret out the assets that the markets may be underestimating. While these assets may be few and far in between, the potential for growth after finding one is tremendous. Value investing is most notably the investment strategy employed by famed investors Warren Buffett, Benjamin Graham, and Charlie Munger.
Focused on speculative investments, growth investors typically look to invest in young or small companies whose earnings are expected to increase at incredible rates in comparison to the market at large. While this investment strategy may provide impressive returns for the ingenious few, young companies are often untried and untested, thus often posing a fairly high risk for the investor.
Tactical Asset Allocation
Finally, we go over Tactical Asset Allocation, an active management portfolio strategy that relies on shifts in asset allocation percentages to take advantage of the current market environment, pricing anomalies, or abnormally strong market sectors. This investment strategy allows an investor to take on a diversified portfolio and grow it how they see fit. When data suggests that there will be a substantial increase in demand for a certain asset, this strategy dictates that a prudent investor may look to shift more capital into that asset class to take advantage of the opportunity.
How To Choose An Investing Strategy That’s Right For You
While there is no “one-size-fits-all” investment strategy, there are certain steps that you can take to find the best one for you. It all comes down to who you are as a person and investor - so here’s a step-by-step guide to choosing and building your investment strategy:
Review Your Timeframe
It’s important to consider the timeframe for your investment as this allows you to adjust your investment objective to the risk you need to take on. It will also affect where you put your investments as some assets or funds are better suited for either short-term investments or long-term investments, but rarely both at the same time.
Ask yourself why you’re looking to invest. Is it to buy a house? Is it to create generational wealth for your children? Is it to keep your money intact while you wait for better investment opportunities?
Understanding this will help you determine the time frame for your investments.
Identify Your Risk Tolerance
In line with your investment time frame, one should also consider and identify their risk tolerance. Risk tolerance is defined to be the degree of risk that an investor is willing to endure given the volatility in the value of an investment.
Essentially, higher risk tolerance is tied with the willingness to risk more money for the possibility of better returns while a lower risk tolerance seeks out investments with lower yet more guaranteed returns.
This ties in well with the first consideration, your investment horizon, as the historical returns of the market have generally been positive over 10 years, albeit the yearly fluctuations in prices have shown greater returns for an ingenious few.
Consider Where To Invest Your Money
You may also opt to divvy up your money across a variety of asset classes such as shares, cash, and bonds to introduce diversification in your portfolio. The process of diversification alleviates the issues of risk as a loss in one asset class may be offset by the gain in another. While it may take more effort to remain up to date across a variety of markets, the advantages of risk reduction and wealth protection through diversification far outweigh the time investment needed to make the right investment.
There are also instances where a certain fund may offer more benefits than others. Many employer-sponsored retirement plans, for example, have the employer match some or all of the contributions you make to the plan. This is free money for your retirement savings and is often one of the most effective ways to save for your retirement. If your employer offers a retirement plan and you do not contribute enough to get the maximum match, you’re missing out on free money.
Evaluate Different Strategies
You’ve considered your investment timeline, taking into account your risk tolerance, and picked the asset classes you’ll be investing in. Now, you finally get to pick and implement your chosen trading strategy.
Lo and behold, the first strategy you pick may not always suit your needs. As we said, there is no “one size fits all” strategy. Your financial situation may change and you might not have the luxury to wait 10 years before an investment turns positive.
Certain market conditions also make it impossible for some investment strategies to be profitable. A global bear market, for example, may bode well for long-term investors but incite fear and panic from short-term speculators.
Finding the perfect trading strategy is a constant process of research, testing, and trial-and-error.
Peccala’s Investment Strategy
While personal experience may build great intuition within a trader, algorithms allow for backtesting trading strategies over hundreds of years. The underlying mathematical models allow for repeatable results within the stock market.
Peccala employs algorithmic trading in its everyday decision-making.
Focused primarily on crypto derivatives, Peccala’s algorithmic trading engine aims to predict the probability of an existing trend being amplified. Whereas other trading algorithms look to buy the dip and sell at all-time highs, we look to ride the waves and expect them to continuously grow.
The Peccala's Trading Engine employs two layers for analysis.
Layer 1: Trend Analysis and Prediction
The first layer, or the Forecasting Layer as we call it, analyzes every currency pair available on our chosen Futures market. From here, we look to identify the market trends and evaluate the probability of the trend continuing. Our dataset uses publicly available raw data such as price, volume, and depth of order book, to compute the probability of trend amplification.
Layer 2: The Digital Trading Floor
Similar to an actual trading floor with hundreds of market researchers reading the charts and making their analysis, Peccala utilizes a collection of hundreds of trading bots that make their own investment decisions based on specified parameters that emulate human “personalities”. Because each bot is provided an equal share of funds, two or more bots that agree on a position will pool together, while bots that choose to invest contrastingly will cancel each other out.
How To Get Started
Getting started with your first investment strategy is a combination of three facets: choosing the right approach, investing in different asset classes, and evaluating the strategy's success.
Choosing the right strategy involves identifying your risk tolerance and investment goals. These will guide your decisions later on as they reveal the different asset classes in which you should likely invest.