As a budding investor, there are number of investment strategies you can apply and the strategy you choose will depend on what your investment goals are, time horizon, knowledge of the financial markets and the amount of time and support you have.

Adopting an active investment strategy means you rely on research and if you have deep pockets, a team or professionals who provide information that will allow you to make decisions about the assets you are trading in order to meet your goal of outperforming the market.

Another aspect of Active Investing is investing in a fund. In this situation the Fund manager whose goal is to beat the market will buy shares based on research that suggests the stock price could rise and will sell when the research suggests the price will fall.

We will explore active investing and look into aspects of this strategy and why it may be suitable for you or why you should consider investing in an active fund.

What is Active Investing

When you adopt an active investing strategy you are buying or and selling assets with the aim of making profit to outperform an index or benchmark.

Depending on your region and location where you invest this benchmark or index you are looking to outperform could be the FTSE 100, S&P 500, CAC 40 or any other actively managed Funds where you could otherwise invest.

With an active investing strategy you are monitoring your portfolio constantly against the market to determine any risks to your existing positions so you can hedge them. You are also looking to capitalise on opportunities and the changing investment landscape with the aim of growing your investments and reducing any potential loss.

Why Active Investing

Here are a few reasons why may consider an active investing strategy as opposed to a passive investing strategy.

Knowledge and Interest

If you have an interest in the financial market or in a particular sector such as Technology, it will be easier for you to find opportunities due to your interest and knowledge you have developed in that sector. 

For example, you love technology – well, everyone loves technology but you have keen interest in what Tesla is doing. You pay attention to Microsoft and you are looking at the latest products from Google and keeping an eye on Amazon. Because you follow these companies closely you can spot opportunities sooner, understand the businesses better and be able to make investment decisions as a result.

The same can be applied to Bio-tech, Cloud computing or any sectors out there. As you maintain an interest in these companies, you gain knowledge, you see opportunities and you take advantage of them and many time before the rest of the market.

Short to Medium Term Events

A lot can happen in the market in what may seem to be a short space of time and with an active investing strategy, you are constantly on the lookout for events in the market that could work against you and take action such as hedging or closing out your position before any potential losses increases.

Market events can change the direction in which a trade is going either in your favour or against you and even if the reasons are not clear or logical at that point in time, good risk management means you act to reduce your exposure, hedge you position and wait for things to come back to normal. 

This could take anything from a few hours to weeks and these market events could be the market reacting to Amazon founder and CEO stepping down, to users on Wallstreet bets taking a position in GameStop and Wallstreet taking the other side of that trade.

Options and Outcomes

An active investing style allows you to tailor your portfolio or investments such that they fulfil a goal for yourself or your clients in the case of a fund manager. Rather than using a particular type of financial instrument, you determine what the goal is and what asset classes and strategy you can apply to reach that goal.

Applying this strategy gives more room for diversification, income from dividends or a particular return. Bonds, Commodities and Forex are a few of the asset classes that can be explored too.

Advantages of Active Investing

Hedging

An Active Investing strategy allows you to make decisions that could change the outcome of the performance of your investments. If you have a financial asset in your portfolio, there could be changes that are political, geographical or man-made that can cause the market to react and one way you can protect yourself is by Hedging. 

An active investing strategy gives you the opportunity to react to a changing situation in a manner that will benefit you and your clients. In other situations, active investing managers can use derivatives such as futures or options and trading strategies such as short selling to hedge their positions.

Adaptability

Since you are not restricted to owning a number of Index funds, you have the freedom to explore the market and build your portfolio in such a way that your objectives are met.

For example, you have been following the impact of Covid-19 on commuting and transportation and realised there is an opportunity for a company that will allow people to interact with each other whilst at home – Zoom or any similar companies.

An active strategy means you would have been aware of this situation and invested in Zoom rather than being restricted to a particular fund. An active fund manger in this situation will consider adding Zoom or other relevant asset classes to the fund so investors can benefit from the performance.

Disadvantages of Active Investing

Cost

Here are the most common costs associated with Active Investing.

Research

Research allows you to make decisions with your investments. Now you can do the research yourself (since you have an interest in the companies) but this is not always the case and often times more than not, research will be paid for. Additionally research is time consuming and will distract you from other aspects of managing your portfolio.

It is important to note that the analysts’ predictions are not always accurate after all they are estimates and the market may react in an unexpected way but with passive investment strategies, this would not be something to be concerned with. An active fund manager will carry out his research of pay for the information from companies that do research and sell to clients.

Transaction

Transaction costs are the other type of costs you will need to consider with an active investment strategy. Chances are with flexibility, hedging and dealing with market conditions, you will need to buy or sell more frequently than you would if you adopted a passive strategy. 

Each time you buy and sell, your incur transaction costs. This can impact the overall return on your investment. The transaction cost for example can be sending your orders to any third party vendors that allows you to connect to the stock exchange where you order is executed.

If you are in a position to have your money managed by an active investment manager such as a Hedge Fund for example, there are a couple of things to note.

• The active management fees can range from 0.1% to 2% of the Assets Under Management (AUM) which means is that the fund manager will be paid between 0.1% to 2% of the total assets under management and between 10% to 20% of the performance of the fund.

• Additionally many active fund managers fail to beat the market – think about the access they have in terms of research, portfolio managers, etc yet a large amount of them fail to beat the market.

Also note you need to be an accredited  investor to invest in Hedge Fund. You need to have an annual income over £100,000 and net assets in excess of £250,000.

Final Note

As we have seen, an Active Investing strategy has some benefits and will work for you if you have a significant amount of money and free time. Having the flexibility to adapt to market conditions is beneficial and being able to protect your position by hedging any risk is an added benefit.

Transactions and Research costs will affect the overall performance of your investment with this strategy and as a large number fund managers fail to beat the market, it is worth considering other options out there.

What is a Bubble

An asset bubble is a situation where the price of an asset rises significantly over a short period of time. This rapid increase in the price of the asset is usually followed by a rapid drop in the price of the asset in a short time frame which often known as a crash or the bubble bursting.

Now there are some relative terms here such as ‘significant’ and ‘short’; how do we know what a short period of time is and what is a significant rise in price? One of the tellings signs of a Bubble is that the price of this inflated asset is often not supported by the value of the product. 

As interest grows in an asset class and as more people purchase the price goes up and this is not unexpected. During a bubble however, there is a significant disparity between the price of the asset and the value of the asset.

It is not easy to determine the value of an asset and that is beyond the scope of this article. It is also worth noting these market inefficiencies give rise to opportunities for Active Investors to explore.

One of the earliest examples of a bubble was the tulip mania in the 1600s when people bought tulips with the belief they could sell it at a higher price in future to someone else. Question: how much was a Tulip worth?

What does Bubble mean

In market terms a bubble or more accurately asset bubble refers to a rapid increase in the price of that asset class in a short period of time. So when we hear people say there is a real estate bubble or stock bubble, they are referring to the rapid increase of the price of real estate or the stock market index in that specific region.

It also means investors are overly optimistic about the price of an asset and this can be seen by their buying of the asset beyond the real value of the asset.

What Causes a Stock Market Bubble

There are different things that can cause a stock market bubble and from what we have seen in the past, they can be caused by the behaviour of the investors and speculators depending the economic conditions. Here we examine some of examples of recent bubbles.

Dot-Com Bubble

Taking a look at the dot-com bubble investors poured money into companies many of which barely had a track record of profits and expected the prices to continue to rise. Whilst there are other factors to consider, it is clear that the irrational exuberance was a major factor in the cause of the dot-com bubble.

The Great Financial Crisis

During the real estate bubble in 2005 that led to the credit crisis in 2008, credit default swaps were used to as a way to insure mortgage backed securities which were traded on the market. 

Since it was assumed these MBS (Mortgage Backed Securities) were secure because the mortgages they were tracking were mortgages where the people were deemed to be low risk in terms of defaulting the mortgage, these instruments were inherently safe to trade and fund managers drove up demand for these asset classes.

A low interest environment also meant people were taking on more debt, buying second, third and fourth homes on interest only repayments. Once the Fed raised interest rates, people who were barely keeping up with the mortgages defaulted on them. The MBS that were packed with these sub-prime mortgages were worthless because their value to an extent as based on the premise that the owners of the mortgage will keep paying.

Easy access to money and how investors reacted to this by taking on too much debt are the main causes of this. The Hedge fund managers and other investment managers that were selling these products also contributed to the hysteria.

Bitcoin and Cryptocurrencies

In 2017, despite Bitcoin being in existence for some time leading to this, there was renewed interest in Bitcoin to put it mildly. As various governments and financial institutions recognised Bitcoin as a commodity or asset class, investor poured more money into Bitcoin.

At the beginning of 2017 the market cap for Bitcoin was $16 billion and by the end of the year it was a whooping $229 billion. The interest in Bitcoin and Cryptocurrencies around this time was something for investors to be wary of and in many cases, the positions taken in Bitcoin were speculative. 

Main street got excited by the prospects of Bitcoin being widely accepted by some countries like Japan, financial institutions considered Bitcoin as an asset class and put money into it hoping the price will continue to rise.

The way investors interpret the economic situation to an extent determines how they behave and in an environment where money is easy to borrow or rates are low, investors are likely to take more risks. 

What Causes the Bubble to Pop

Well the party cannot last forever right? And what goes up must come down as the saying goes. To understand what causes the bubble to pop, let us take a closer look at what leads to the bubble and what they different stages are.

Charles Kindleberger (cool name by the way) in this book titled Maniacs, Panics and Crashes: A History of Financial Crises outlined the five different phases of as asset bubble which has been summarised in our own words. Here is a link to reviews on this book.

Stage One – Displacement

This is the stage where investors notice something new like Bitcoin, or Tulips or a particular asset class. 

Depending on the nature of the speculative boom, it could also be economic conditions such as low interest rates, government assistance cheques to help furloughed workers. Think of this stage as a shock to the system or something new that catches the investors eyes.

Stage Two – Boom

At this stage, the money is coming in as investors start purchasing more of this asset. Their biases kick in and FOMO (Fear Of Missing Out) is driving more investors from Wallstreet to Mainstreet to put their money in this asset.

Stage Three – Euphoria

We are approaching fever pitch at this point as every new article seems to be talking about this asset. Everyone one from accountants to zookeepers are looking to get in on the action and FOMO has now been combined with YOLO (You Only Live Once).

The underlying asset is hitting new highs on a daily, weekly or even monthly basis further driving the prices higher.

Stage Four – Cataclysm

When it gets to this point, some investors usually the ones who got in early are ready to exit. They start cashing out, closing their positions and selling the asset and the effect on the price of this asset that has been hitting new highs is now evident.

New potential investors at this may wonder at the lack of not so positive headlines regarding this asset class. In some situations like real estate, the initial investors who took on debt to fuel their exuberant spending now become desperate to sell and enough of them selling can have an effect on the prices.

Stage Five – Pandemonium

At this stage, the fan has been struck with proverbial manure and everyone is heading for the exit. The price rapidly drops are there are more sellers than buyers and investors are eager to exit their positions quickly whilst demand diminishes for the asset.

The bubble bursts when a large number of investors start selling the underlying asset class in a short period of time. This could be due to a change in the economy such as interest rates going high or some news or event that causes people to view the asset in a different light.

What are the Consequences of Stock Market Bubbles

Looking at the recent market bubbles, we know there are consequences for the investors who invested in the asset class, for the companies where relevant and possibly for the economy as a whole.

During the dot-com bubble a lot of those companies that had no earnings but had increasing market capitalisation as investors poured money into them went bust when the bubble popped. The price of these companies at its peak could not be backed up with the real value of the company.

Although many technology and internet companies were impacted negatively, some of them survived this period and for the wider economy there was some concern however the main impact was felt by the people who put their money in internet companies that failed.

Moving forward to the housing bubble and the financial crisis, we can see a different type of impact and one that is arguably deeper in terms of economic damage. Unlike the dot-com bubble, in the housing bubble people lost their homes and this had a direct impact on other aspects of their lives. 

Interest rates were low and many investors purchased new homes, some entirely financed with debt and placed these home on interest only mortgages or adjustable rate mortgages. 

Whilst rates were low, many could barely repay these mortgages and on Wallstreet these mortgages were packaged, sliced and sold to investors. As interest rates were raised, many of the multiple home buyers who had sub-prime mortgages (basically a higher possibility of default) defaulted on their payments.

The Credit Default Obligations on these financial instruments could not be fulfilled as many people defaulted on their mortgages so Uncle Sam had to step in to bailout institutions. Banks were stricter with their lending, people lost their investment homes and in some cases their own homes, job cuts were common place and the overall standard of living for many people dropped.

This is just a quick summary to highlight the impact of this housing bubble and financial crisis brought on by the credit crunch. The economy, jobs and housing were impacted. Banks failed and some countries came close to collapse due to civil unrest and a lack of trust in the financial system.

The Bitcoin bubble in 2017 was significant but not as impactful to the wider economy and part of the reason was that Bitcoin and other Cryptocurrencies were not yet mainstream in such a way that it would affect the wider financial system.

Many people at that point considered it to be more of a speculative tool and treated it as such so when it failed, the impact was within a small niche of everyday society.

How to Protect Yourself

You should read our article on how to survive a recession because it covers important points and like we have seen in the past, a bubble can lead to a crash and possibly a recession.

It is difficult to know there is a bubble due to human nature and the lack of relevant information however is important to recognise when the market or an asset is entering bubble territory.

Understand the Asset and Manage Risk

It is important that you learn how to determine the value if a company or an underlying asset and if you choose to go with the market, you need to manage risk. Fundamental Analysis can help with this as key ratios are examined among other things to determine the value of the asst.

Diversify your Portfolio

Properly diversifying your portfolio will minimise the risk of being wiped out completely. Investing in different asset classes, sectors or industries will help in the event of a bubble in one.

Hedge

You suspect the market may fall although timing it is impossible, you need to hedge or have a plan to hedge your position so in the event of a rapid decline in prices or lack of liquidity, you can reduce your potential loss.

Final Note

A market bubble is characterised by a rapid increase in the price of an asset in a short period of time and this can range from weeks to months. There are five stages in a bubble and one stage does not necessarily lead to the other however many bubbles have followed this pattern.

Bubbles are can be caused by different factors and depending on why investors are pouring money into the asset. When the bubble pops as they all do, the impact could be widespread as we saw in the housing bubble and credit crunch or just within the asset class as we saw with the 2017 Bitcoin bubble.

It is impossible to time the market and to know when the bubble will pop that is why it is necessary to improve your financial knowledge, learn how to analyse an asset class and if you choose to participate in an asset in a bubble stage, do not over expose yourself to a position, diversify your portfolio and hedge your bets.

In the past few years SPACs have come to prominence and while they are not entirely new, there is more buzz and beyond that a few interesting acquisitions that have taken place recently.

This year alone 2021 there has been over 130 SPACS with plenty more planned for this year. SPACs as we will refer to them from now on, are non-operating publicly listed companies that are setup with the purpose of purchasing a private company.

What is a SPAC

In simple terms, a SPAC is created for the main purpose of raising capital through an IPO (Initial Public Offering) for the purpose of acquiring an existing company. 

SPACs may also be known as blank check companies and it allows a company to go public without going through process of an IPO. They provide an opportunity for retail investors to invest in private equity type transactions.

In many cases the investors in the SPAC will pool their funds together with the purpose of investing in a company.

How does a SPAC work

Money is pooled together by investors in the SPAC, a timeframe is allocated for which the fund is used to purchase the target company and after the acquisition, the SPAC is usually listed on the one of the major stock exchanges.

The fund put together for the SPAC is placed in an account and will not be a returned to the investors unless a company is acquired or the allocated time has elapsed and the SPAC liquidated.

Why do SPACs Exist

There are a number of ways a private company can go public and SPACs are just one of the ways. The other ways are via a Reverse Merger or an IPO.

When a company chooses to go public via an IPO a process needs to be followed and during this process, each aspect of the business is checked such as debt level, any risks and the financial health of the business among other things. 

Once the SEC is satisfied, depending on the location the company can begin to work with the Exchange to get a ticker symbol through which potential investors will be able to purchase their shares.

The IPO process can take months if not years and with the multiple lockdowns brought about by Covid-19 and delays to listing, it is not too hard to see why investors chose to go public using SPACs.

SPACs are another way a target company can be acquired without having to go through the IPO process. During the covid-19 pandemic as an example, many companies that had IPOs planned saw their plans negatively impacted by the lockdown so SPACs were an easier way for investors in the target company to get their money. 

From a SPAC sponsor, the reasons for doing a SPAC include being able to take advantage of opportunities in a shorter period of time, SPACs are an alternate source of capital and the opportunity to apply a wide range of investment strategies.

For the target company, here are a number of reasons for doing a SPAC.

1. SPACs offer more flexibility with capital.
2. Quicker time to get to the market when compared with an IPO.
3. There is added value from the investors in the SPAC from their knowledge and past experience in that sector.

How to Invest in SPACs

Look out for new SPAC listing from financial news sources and pay attention to associations like SPAC Research as they highlight filings which are formal notices that a SPAC intends to go public.

Investors can invest in a SPAC by purchasing individual SPAC securities or by purchasing an ETF that tracks SPACs. A SPAC ETF will provide a certain level of diversification and security since the impact of one SPAC underperforming will be minimal compared to buying an individual SPAC.  

SPCX is the first actively managed SPAC ET, SPXK and SPAK are a few SPAC ETFs and other SPAC companies that are not ETFs. 

A few noteworthy SPACs include PLBY (Playboy if you guessed it right) who partnered with Mountain Crest Acquisition Corp. On the first day of trading the price was down by 2.7% but these are early days.

As of the 13th of February 2021, the founders of LinkedIn and Zynga are close to a deal to merge their blank cheque company with Joby Aviation as the FT put it. The SPAC in this case is called Reinvent Technology Partners and their SPAC which raised $690m in 2020 may close out this deal by the end of February.

Lucid Motors an electric car maker has announced the biggest SPAC to date as they have formed a merger with Churchill Capital IV Corp. The PIPE or Private Investment in Public Equity is priced at $15 a share.

To make the UK more attractive for SPACs, the UK Government is looking into review the legislation that will allow fast growing tech companies to list in London. The government is looking or relax the rule around SPACs.

The Good Bits

A majority of SPACs are priced at $10 a share so they are cheap and provide an opportunity for retail investors to purchase them. 

On the first day of trading, the price of the SPAC does not jump very much and on average in 2020, there has been a modest increase in the price on the first day of trading.

SPACs provide the opportunity to invest in companies that will be shaping the future. Virgin Galactica, Nikola the electric automaker and Draftkings are among a long list of companies that have gone public via SPACs.

SPACs are more accessible to smaller investors. Considering the price of SPACs and the higher number of share available, smaller investors are able to get in on the action as it were.

The not so Good Bits

When investors put their money together and form a SPAC, the possibility remains that the allocated time to find a deal (usually 24 months) will elapse before a target company is acquired and in that time, the money would have just sat in an account.

Whilst SPACs have made a recent comeback, not all SPACs have had a stellar performance. Virgin Galactic Holdings (SPCE) has appreciated 146% in the year since it went public, but others have barely outperformed the index in which they are listed.

Final Note

SPACs or blank cheque companies have been around for some time but to the impact of Covid and other factors, a few high profile acquisitions and mergers has renewed interest in this topic.

These companies are formed with a small group of investor initially who pool their money together and look for the right company to acquire. There usually is a timeframe in which the SPAC needs to find a deal otherwise the money which is saved in an interest bearing fund is allocated back to the initial investors.

The companies that had planned their IPOs in early 2020 were impacted by the lockdowns that followed in the year and many had to abandon or postpone their IPO plans.

SPACs are an alternative for both the Sponsor and Target to get to market and open up the opportunity to smaller investors. Can you lose money on SPACs? Yes – just like any other investment and although many SPACs are priced around $10, their price can go up or down when trading commences.

Investors can have a piece of the action by looking at news sources or relevant outlets to know what upcoming deals are there. ETFs mentioned above provide a more diverse way to invest in SPACs.

What is an Investing Strategy

A strategy is plan of action that helps you accomplish a goal or aim so by that logic, an investing strategy can be defined as a plan or action that when followed will help achieve an investing goal.

An investing strategy is what determines an investment decisions based on a number of factors that include how much risk the investor is ready to take and for how long the investor wants to put the money away for.

The goal could be to earn more income for retirement, it could be financial independence and retiring early (FIRE), or being a participant in the market without the headache of constantly looking at what to buy or sell depending on the latest fads.

There are many stocks on the market, many financial instruments and many different geographical regions. Having a strategy will help you maintain focus or at least provide a starting point from which you can begin to explore the rest of the market.

In no particular order, these the main investing strategies.

Dividend Growth Investing

With this strategy as an investor you are looking at stocks that pay dividends and have done so for a significant number of years. This does not mean other factors that indicate the financial health of the company are ignored because if the company fails you can wave goodbye to any dividends.

The main aspect of this strategy is to identify companies that have paid (increasing) dividends over a period of time and add them to your portfolio. As an investor you will add dividend stocks to your portolio because of the income it provides. The dividend it usually paid per share you own.

There are two things to mention when it comes to this investing style and they are the Dividend Yield and the Dividend Payout Ratio.

The dividend yield refers to how much the company will pay out in dividends each year in relation to its stock price whilst the dividend payout ratio is portion of the company’s earnings that is set aside to pay dividends. 

For example, a company may choose to set aside 5% of its earning to pay dividends and in this case it should clear to see the more a company earns, the larger the value of the dividend will be so the earnings growth of the company is also an important factor.

Growth Investing

This method of investing requires looking at new industries or sectors, identifying companies that are growing in that space and investing in them. 

There is a process in which these companies are identified and a number of factors need to be considered such as market share, earnings, new technology, or anything that will in future allow a company have above average returns in that sector.

The process of identifying potential companies will uncover companies that are undervalued and as time goes on when the value is realised, more interest in the stock will come about when the market realises and this will be reflected in the price

A number of financial ratios such as price to earnings and price to book ration will be used to determine whether or not the company is overpriced and can be useful when identifying stock with potential high growth.

An investor can also consider ETFs in fast growing sectors and passively benefit from that. Notable growth investors include Philip Fisher who is known for his popular book Common Stocks and Uncommon Profit, Peter Lynch and William O’Neil.

Income Investing

As an income investor your goal is to earn an income from your investments and to accomplish that a number of income generating asset classes can be added to your portfolio.

This includes Dividend Stocks, ETFs, Mutual Funds, Real Estate, REITs and Bonds. We have covered aspects of Dividend stocks so will not go into much details here.

Purchasing an investment property and renting it out is one way to earn income on the property as the asset’s value increased. Investing in Real Estate Investment Trusts are yet another way to earn income from property since a large portion of the profit is paid out.

You can earn interest from a Government or Corporate Bond and when the loan term is reached, the initial amount is paid back to the investor. Government bonds are deemed to be less risky so the interest on is lower compared to Corporate bonds.

ETFs or Funds that track dividend paying stocks are also a good addition to a portfolio since the dividend paid by the companies are either put back into the ETF or paid out to the investors. Diversification is also key here because income from one source can be impacted due to tax, low interest rates or other factors which can have an effect on returns.

Momentum Investing

Momentum investors will lean towards market indicators (technical analysis) to determine if and when to purchase an underlying security.

Technical indicators such as moving averages, Relative Strength Index, Trend lines and Average Directional Index are used to determine if there is momentum is growing in the underlying asset class.

The aim here is to use the indicators to identify a trend early, determine the direction and take a position which means to buy or sell the asset. If the outcome of the research suggests the trend is down, momentum investors will sell the underlying asset and if the trend shows an upward trajectory, investors will buy the underlying asset.

Value Investing

As a Value investor you are looking to identify securities that are underpriced and buy them with the aim that the market will catch up with your decision. Value investors will arrive at a decision to purchase a security after carrying out fundamental analysis in an attempt to determine the intrinsic value of the security. 

The prominent value investors are Benjamin Graham who is considered the father of value investing since he developed the concept, and Warren Buffett in more modern times. The main metrics used to determine a stock’s value include the price to book ratio, price to earning ratio, free cash flow and debt to equity ratio. 

Value investors tend to be contrarian because whilst the market may think the value of a stock is X, the market could be overreacting or underestimating the company so a value investor will tune out the noise, determine the value of the underlying company and make a decision based on the outcome of the analysis.

Passive Investing and Active Investing

Passive and active investing are widely considered to be investing strategies although they differ from the investing strategies listed above. You can read more on active and passive investing on this link here to dig further into what they entail.

Consider an example where, as an investor, you wish to invest in an asset class that provides an income. This is considered as Income Investing. Additionally you choose to purchase ETFs that consists of companies that pay dividends and hold them. This is a passive approach to accomplish that goal.

An active example will be a situation where you do research and find stocks that pay dividends and buy them and earn a dividend from them. You may choose to hold the stocks and if circumstances changes, they can be sold. In some cases, you can also purchase an actively managed fund.

Passive and active investing in this sense refer more to the style in which you choose to execute your strategy. That being said, many investors have put money in recent years in ETFs and Index funds since these provide diversification and a low cost alternative.

Impact Investing

For those investors who are increasingly conscious of what the impact of doing Business is having on the environment and the people in around the business, Impact Investing is a strategy that can provide financial gains whilst preserving the environment.

You can read more on what Impact Investing is here, what the benefits are and how there is increased focus in this space.

Small Cap Investing

Small cap companies depending on the region, are companies whose market cap is between $250million and $3billion. With small cap investing strategy, the aim here is to look for companies that fall within that bracket that have strong earnings, balance sheet and are set to grow. The goal is to identify companies that are growing and invest in them before they go big.

Whilst the risk remain, investing in small caps provides opportunities for investors to potentially discover the next Netflix or Amazon and invest in them. There are indices that can be invested in via ETFs or Index Funds. This way an investor can diversify their portfolio and reduce the risk of having all their investment in a handful of companies. 

It is worth nothing small caps can be volatile and for many of these small cap companies, their financial numbers are not readily available to make an investment so an investor will need a bit more research to get information on these companies before deciding on investing.

Buy and Hold

This investment strategy leans towards a passive approach to investing and with this strategy, an investor will purchase an ETF, Index or Stock and hold them for a long period of time whilst disregarding short term price fluctuations.

If you discover a stock that is undervalued after carrying out research and fundamental analysis, an investor may choose to purchase this stock and hold until the value is realised and this can sometimes take a number of years.

This strategy also raises questions regarding active or passive investing and which is superior and there is data to show that sometimes one style would have produced a better return over the other. Read more here about how these styles compare.

That being said, active investing comes with costs such as transaction cost, fund management and research to name a few that passive investing does not have so buying and holding over a long period of time has been shown to provide superior returns due to fewer transaction costs associated with buying and selling the shares or asset class frequently.

What Investment Strategy is Best for Beginners

As a beginner, investing can be overwhelming at first in part due to the vast information and resources that require some time to understand. 

No two beginners are the same and these differences are important for example, different ages, income levels, career and other commitments that could determine how an investor may choose to approach investing.

A conservative and less risky approach can be useful for an investor for example as a beginner, where you may choose to adopt a passive strategy that seeks growth. The way you may go about this is putting a large portion of your portfolio in ETFs or Indices that track small caps, high growth companies or companies in new industries.

On the other hand you may choose to get your hands dirty a bit and invest in individual companies in a sector where you have an interest or you have followed macro events closely and realised that a lock down could lead to an increase in Netflix subscribers and other streaming services so you purchase their stocks.

Note the above instances are examples and whilst there is not best strategy for beginners, it is wise to invest a large portion of the portfolio in ETFs and Index funds in order to achieve diversification and exposure to companies in different sectors or regions.

You may wonder what is the best investment strategy or what is the most successful investment strategy? The answer is simple – the one that helps you attain your investment and financial goals hopefully without too much risk.

How do you create an Investment Strategy

With our understanding of what an investment strategy is, the first step in building an investment strategy is outlining what your investments goals are. Is the goal to generate income? Or to get growth in a shorter period of time or to have a more hands off approach to investing.

Once the goal has been established, the next step is to explore the investment strategies mentioned above and apply them. For example if your aim is growth you may choose to focus on small cap stocks, carry out fundamental analysis to identify growth stocks and look further to find undervalued companies and invest in them.

The important thing to remember is that one strategy may not work and multiple strategies may need to be applied at different times depending on market conditions.

Final Note

The examples above outline the main investing strategies and it is important to first seek professional financial advice before making any investments.

The different strategies in the article however provide points you can consider as a new investor or new strategies to adopt if you are not new to investing.