What are the most successful investment strategies?

We never miss an opportunity to talk about the potential benefits of investing.

In fact, one of the main reasons why we built Plum was to help put the process into the hands of anyone who wanted to invest their money 📱

However, as with many aspects of personal finance, there is no ‘right’ way when it comes to the question of how to invest.

Your approach to investing will be dependent on your own situation, with the decisions you make very much dictated by things like the time horizon of your investments and (linked to this) your appetite for risk.

What is an investment strategy?

The reason people invest their money is to try and grow their capital to accumulate wealth or generate an income from their investment. The various investing strategies they might use simply describe the different approaches they can take to try and achieve these objectives.

A ‘strategy’ could be something as fundamental as using diversification as a passive investment strategy to help minimise risk or using a buy-and-hold mentality to deliberately avoid making short-term decisions.

If you’re ready to invest, any strategy you use should consider factors like your age, marital status, dependents and financial goals.

What are the benefits of having an investment strategy?

As we mentioned previously, there’s no single best investment strategy to suit everyone. Each strategy will offer distinct advantages and disadvantages.

An investment strategy could help to:

• manage or minimise the impact of inherent risk

• reduce trading costs or tax payable on any earnings

• lower the time/effort spent managing investments

Of course, there are no benefits without potential stumbling blocks.

When it comes to investment strategies there is no escaping the fact that many of the decisions are made based on predictive analysis. And as we all know, past performance is not a reliable indicator of future results!

What are some of the most successful investment strategies?

1. Dollar-cost averaging (DCA)

Dollar-cost averaging (or pound-cost averaging) aims to automate many of the micro-decisions when investing money and reduce the overall impact of volatility in the price of your target investment assets.

This long-term investment strategy works by dividing the total amount to be invested into smaller, equal sums of money. These then drip feed into your chosen assets at regular intervals for a set period of time, regardless of the asset’s price (though intermittent scheduled reviews are also essential).

The mechanics of this strategy mean you’ll naturally purchase fewer units when the price of your chosen asset is higher. But, when the price is lower, you’ll capitalise by automatically buying more shares for your money. In essence, with DCA you prioritise time in the market, instead of trying to time the market (which is notoriously difficult in practice).

Because DCA aims to remove some temptation to make emotionally-led investment decisions, it can be especially powerful when combined with automated features that you get with an investment app like Plum.

You can configure the Plum Splitter to apportion your deposits between your savings accounts and investments you’ve previously selected, meaning there’s no need to manually place trades. Although, it’s prudent to periodically review investments to ensure they’re still the right ones for you.

2. Index investing

If you’re happy to take a more passive approach, and you don’t mind sacrificing the best possible yields in favour of an average return that is potentially more stable, you could invest in funds.

Funds allow everyday investors to pool their money and take advantage of efficiencies from operating as a group, because the funds are heavily diversified with many different individual assets.

Investment funds are managed by professionals to maximise returns whilst achieving a specific aim. For example, a fund’s aim could be to focus on a certain asset class, such as Technology or Environmental. Alternatively, a fund might attempt to mirror the performance of a particular stock market.

The composition of an index fund is constantly evolving, as the fund manager responds to market forces. So, investing into this type of fund can make sense if you prefer to set-and-forget with minimal time/effort.

Plus, you can save on trading fees with this strategy because, in theory, you’re not regularly buying/selling individual assets 🥵

💡 A note on ‘index and a few’ investing

When deciding between using your money to buy stocks or index funds, remember that the two options are not mutually exclusive.

By predominantly using the index investing strategy and then adding a few individual company stocks into the portfolio mix, beginners can maintain a mostly lower-risk strategy (by limiting the impact of volatility on their portfolio) whilst still backing the businesses they believe will yield the highest returns.

3. Value investing

So far, the investing strategies we’ve looked at have centred around controlling risk. Value investing is a little more technical because decisions are made by identifying companies that are perceived to be undervalued on the stock market and whose share price could be due a correction.

Value investors will look to buy while the price of a given asset is considered low (based on a calculation of the company’s intrinsic worth). That sounds easy enough, but being able to do it reliably is a skill that some people spend a lifetime trying to master (Warren Buffet is known for this).

For those of us who don’t have the time to perform this lengthy and detailed research when compiling our investment portfolios, the Price/Earnings Ratio (P/E Ratio) is a fairly well-known and accepted way to identify companies that can be considered to be punching above their weight 🥊

If that still sounds like a little too much effort, there are funds specifically made for value investors, which contain a bundle of stocks that are believed to be currently undervalued on the stock market. As with all investment funds, you’ll pay a fund management fee for this convenience, but it can save you a lot of laborious research in exchange.

4. Growth investing

Growth investing is a strategy that can be employed over either the short or long term. It works by identifying businesses whose stock is believed to show the greatest potential for future earnings through an increase in value.

Growth investors look to find the stocks that will be the rising stars of tomorrow. And it’s not uncommon for them to consider investments with a time horizon of multiple years.

There is no fixed or defined approach when it comes to growth investing. However, investors who use this strategy will broadly aim to assess the current health of a company’s stock and potential for growth. They may look at the current composition of the leadership team at the business in question and consider the strength of any potential competition in the marketplace.

Growth investing tends to work best during periods of low inflation and interest rates because businesses can find it easier to borrow money that they can use for expansion. Conversely, if there are signs of an economic slowdown, growth stocks can be the first to feel the pinch.

Another potential limitation of this strategy is the fact that a business solely focused on growth may be less likely to pay out dividends, as the cash is required to support the growth they’re aiming to achieve.

5. Income investing

Most people tend to invest with the hope that the underlying value of their chosen asset will increase in value and they can sell their investment for more than paid. This is a way for investors to earn a return, but there are other ways to make money from owned investments.

Although the value of bonds is often considered to be less volatile than stocks, bonds can yield fixed cash interest payments. This allows investors to earn a predictable return without selling the underlying asset.

Another form of income that can be earned from investments is in the form of dividends. These are the cash payments made by a business to the investors who bought their company’s stock.

If a company consistently pays dividends it can be an indication of stability, and so these are exactly the types of businesses that value investors will seek to target. And by reinvesting any returns they earn, they can also take advantage of the power of compounding.

💡 A note on investing in a recession

Although a significant market downturn can see the value wiped from some investments, times of recession may also provide an opportunity for investors who try to ‘buy the dip’. Identifying that dip is not so easy in practice, but there is a chance to buy low and sell high.

Investing Tips

The most successful investment strategy for you will be the one that best fits your own circumstances and priorities.

However, if you’re just getting to grips with wealth management for yourself, there are a few general investing tips that might be of help:

Tip 1: Set Goals

Before starting out, it’s useful to define what success looks like for you. By budgeting for how much you intend to invest and the time horizon for your investments, you can identify the right investments to suit your strategy.

Tip 2: Do your research

Knowledge is power. Having an understanding of how the stock market works and how different assets (e.g. stocks, bonds and funds) might behave may help contextualise the impact of world events on your portfolio value.

Tip 3: Decide your risk tolerance

The question every investor must ask is the level of risk they are comfortable exposing themself to. This risk will be related to the potential returns they expect to receive and relative to the length of time their money is invested.

Tip 4: Diversify your investments

Just how much diversification is enough will be for each individual to decide. But selecting a varied mix of different assets (in terms of industry, geography and asset class) is a way to reduce overall volatility in your portfolio value.

Tip 5: Optimise your portfolio

When you start investing, it’s wise to be realistic about your expectations. Nobody gets it right first time, or all of the time, so be prepared to fine tune your selection of investments and your asset allocation.

How to invest with Plum

If you’ve decided that you’d like to invest and you’re looking for the best investing platform, you can consider Plum.

Plum is an investment app that can help you automatically set money aside, create a Pocket that pays interest (like a savings account) or start investing.

With the Plum app, you can trade stocks (buy or sell fractional shares) or choose from our range of mutual funds. Plum was designed to make the process of managing investments and implementing your strategy easier.

Check out our website to learn more about how you can invest with Plum.

We hope this article has helped you find the right investment strategy for you. Please remember that, as with all investing, your capital is at risk. You shouldn’t invest in or deal in any financial product unless you fully understand it and the inherent risks. If you automate and invest you should be satisfied your choices are suitable in light of your circumstances and position.

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