Investment strategies vary considerably and should fit with your risk tolerance, involvement and timing needs. Keep in mind that investing entails risks including the possible loss of principal.
As long as long-term goals are being saved for, investors can usually manage short-term market fluctuations through buy-and-hold investing strategies.
Many investors invest in stocks because of the promise of high returns and inflation protection. Stock prices depend on market perception of company profitability and revenue as well as sentiment.
Investors can also utilize a “buy and hold” strategy, which seeks investments likely to perform well over several years without trying to time markets or take advantage of short-term dips. This approach lowers risk by not timing markets or taking advantage of short-term dips.
Growth stocks are expected to outstrip market or economy average growth rates and may experience more volatile trading than their counterparts; they may offer significant returns if kept for the long haul, though. Value investors focus on stocks trading below their intrinsic values; Warren Buffett popularized this approach which looks for companies with strong financial metrics such as profit margins and revenues that pay out regular dividends to shareholders.
Bonds often don’t get as much publicity as stocks (perhaps it’s all those pajama nights and taco Tuesdays?), yet bonds can help meet many goals including protecting principal, producing income and diversifying portfolios.
If your main objective is capital preservation, investing in bonds issued by stable governments could help to shield you against the possibility of experiencing principal loss during an adverse year. They also offer regular interest payments that help offset stock investments’ volatility.
Many strategies have evolved to assist buy-and-hold investors with managing the inherent interest rate risk associated with bond investing, including ladder and barbell strategies, rate anticipation trades, global growth patterns and emerging market investing. Credit risk (the risk that bond issuers won’t be able to pay back principal or interest on time) should also be taken into consideration by buy-and-hold investors.
Defensive assets offer your portfolio added protection during market downturns; examples of defensive investments include cash, Treasuries and investments with low or negative correlation to stock markets such as gold.
Investors typically regard companies producing necessities or consumer staples as defensive stocks because consumers will require these products regardless of a recession. Furthermore, these sectors typically experience lower volatility levels that help minimize overall portfolio declines when stocks sell off.
Cash has traditionally been considered a safe investment. However, due to today’s ultra-low interest rates and inflation’s effect, holding on to cash will eventually erode purchasing power over time.
Diversification refers to spreading investments among different types of assets, industries and sectors that behave differently under changing market conditions. Doing this can protect your portfolio against market downturns while simultaneously lowering overall risk.
The basic model involves investing in stocks, bonds and cash or cash equivalents – either directly through individual securities or indirectly via funds that offer exposure to multiple asset classes.
Diversifying an asset class through diversification involves choosing companies from smaller to large; with both cyclical and non-cyclical businesses. Geographic diversification also offers investors another means of spreading funds across regions or countries.
Diversification helps mitigate unsystematic risk, such as those associated with individual companies or small groups of them, but does not protect against market downturns or guarantee returns. It is therefore vital that investors first assess their own risk tolerance and financial goals prior to developing an investment strategy and rebalancing their portfolio as needed based on changing personal circumstances and market conditions.