Investment Strategy Basics

Without proper investment planning, you are unlikely to have any chance of success in your financial endeavors. Understanding how finance works and what are the various types of investing strategies are the most important aspects to a sound investment portfolio.

In the world of finance, an investment strategy is nothing more than having a set of rules that come with certain procedures that are designed to direct you while making selections for your investment portfolio.

Investment strategies are devised around your risk-return runoff. This means your plan must balance the overall risk with the accumulation of solid earning investments that you build in your portfolio. Some investors will try to maximize their returns by investing in high-gain/heavy-risk assets, while others will play it really safe and select assets that are not too risky but have very slow yields.

The most effective investment strategy is to be somewhere in between these two types of investors.

When investing in the stock market, there are several investing strategies that are available for investors. Remember that all traders, fund managers and investment firms have a trading strategy in place at all times to help them make smart investment decisions while remaining emotional detached from trading. When having a stock market investing strategy, you must stick to these sets of rules that you have laid down and do not deviate. If you do, then you will let emotional bias interfere with sound decisions that have been based on historical analysis.

There are several basic investment strategies which include passive investment strategy, balanced strategy, buy and hold strategy and passive buy and hold strategies.

Passive management is an investing strategy where you try to make as few portfolio decisions as you can to try to minimize the cost of transactions which in turn reduces the incidence of capital gains tax.

Passive investing mostly refers to using marketing indexes inside the equity market. An index fund will track a specific market index and is becoming one of the most common investment strategy types which include hedge funds, bonds and commodities.

The basic concept of passive investing seems to run against the very beliefs of most investors. Passive management strategies are based behind the belief that by using an efficient marketing hypothesis with balanced market prices it is impossible to get ahead through active management strategies. In the long term, an investor using passive investment strategy will have an average cost performance that is equal to an average market which will lead to reducing overall investment costs that form just trying to beat the market average.

A balanced investment strategy is accomplished by designing your portfolio with an allocation and management strategy that is aimed at balancing your risk against your return. These types of portfolios are usually divided between equal investments in equities and fixed-income securities.

While this type of investing strategy may generally aim at this balance, it does carry more risk that plans that are just aimed at preserving current capital gains. While it seems like balanced investment strategy is a sound plan, it is overall a aggressive strategy and is best suited for investors who have a longer period to wait for gain (typically five years) and that have a tolerance for some risk.

One of the best investment strategies, used by Warren Buffet and other big name investors, is the buy and hold investing strategy. This is a long term passive management plan where that in investing in the long run, financial markets will give you a good steady rate of return no matter what volatility or decline happens in the market. The main belief behind this strategy is that if you enter the market on the low ends expecting to sell on the high end, this is not the best thing to do for small individual investors who are building a portfolio.

One of the biggest beliefs behind buy and hold investing is that by just holding onto to your assets instead of constant selling or buying then you don’t incur the fees associated with constant selling like brokerage fees and bid/offer spreads that incur during transactions.

A buy and hold investing strategy will allow you to keep your securities through all volatile markets with the belief that in the long term, your investments will still have value in the end.

One of the most popular and dangerous aggressive investment strategies going today is day trading. The practice of day trading is usually the most common form of online stock market investing and some feel it is no different than gambling in Las Vegas.

This investment strategy revolves around buying and selling stocks, stock options, and future contracts in the course of one day where the equity is usually sold before the close of the trading day.

This is one of the highest risk versus return strategies out there. The potential to make a lot of money is outweighed by the chance of losing lots of money with this strategy.

One of the most typical forms of day trading is trend following. This a simple technique of assuming that financial instruments which keep rising will keep rising and those that are dropping will keep dropping. A day trader will buy a stock or other instrument that has been rising on previous days in hopes that when they sell it at the end of the day it will have kept up its trend.

Another questionable form of day trading is selling short. Some feel that short selling is one of the reasons for the current volatility of the stock market. This approach involves buying stocks with the intention that these stocks will fall and you will make a gain by taking advantage of this drop. The risk with this form of trading is if the stock rises, you lose any chance of gain from this investing strategy.

Having an investing strategy is the key to working with today's tough economy. You must look at your investments as a long term security instead of a short term gain. Those that do make money with aggressive investment strategies have the money to risk. If you are a new investor, it is best to begin with a passive management plan and keep your investments for the long term. If you have a large enough portfolio, it is advisable to get an investment manager to handle your asssets.

I have included below a video with Warren Buffet who is the most important person in America when it comes to investing.