Using the right portfolio strategy is the best pathway to financial freedom. This can be considered a secondary source of income or as the additional savings, or to pay off debt, the impact of a strategy is better on the financial future. Different types of portfolio strategies may seem overwhelming initially, and there are different segments such as stock and bonds where you can invest.
The guide below will help you make the correct portfolio strategies. Moreover, if you are a beginner, you can consider these pointers every time you invest in the stock market. This will help you make a goal-driven portfolio strategy that fits your situation and objectives. Keep reading to learn more.
- What is a Portfolio?
- Types of Portfolio Strategies
- Defensive Portfolio Strategy
- Different types of investment strategies
- How To Choose Your Investment Strategy
- 6 Types Of Investment Strategies
- Conclusion – Types of Portfolio Strategies
What is a Portfolio?
A portfolio is the collection of financial instruments such as shares, stocks, bonds, mutual funds, commodities, exchange-traded funds (ETFs), and even cash.
It also includes the assets such as real estate, art, and private investments that can form part of the portfolio.
Why is it Important to Have different types of Portfolio Strategies?
A strategy is important as it is a kind of roadmap through which investors can use their assets properly to achieve their financial goals. The market is unpredictable as it is volatile. Moreover, the market is driven by human emotions, and any unfavorable event can lead the markets to move drastically.
In short, an investor should not be blown away by any the sudden upside or downside, and should have a clear objective in mind is important. It is important to preserve the capital, and it should be the investor’s primary goal. The profit comes way more later for this. Having a good strategy is important, resulting in the hedged risk.
Types of Portfolio Strategies
Here are some of the common portfolio strategies used by investors and traders around the world:
Active Portfolio Strategy
An investor with an active strategy aims to beat the benchmark returns. This is an investment approach where the investors use the forecasting and assumption techniques to help determine the securities to purchase and gain profit. An investor who follows this technique needs to be active in the market and make the trade frequently. The one who uses the active portfolio strategy aims for the long-term moving capital consistently into profitable securities. Apart from this, the investors try to identify the mispriced or undervalued stocks in the current markets. This is the best strategy for the risk-takers in the share market.
Passive Portfolio Strategy
The passive strategy is the total opposite of the active strategy, which is more of a hands-off approach. This strategy aims to track the market-weighted index strategy, also known as the passive strategy or the ‘index investing.’ The three behind this investment is that the market is efficient. The investors who follow this approach are the ones who believe that it is impossible to beat the market. This is a great way to cut down the cost of handling the portfolio as the professionals change fees for the management.
Aggressive Portfolio Strategy
Another portfolio strategy is the aggressive portfolio strategy used by the risk-takers. As the name implies, the investment technique maximizes the returns by taking a relatively higher risk. This is when an investor approaches to invest in expensive stocks and provide great returns. Capital growth is the primary objective rather than preserving capital. The motive behind these investments is that ‘Big rewards carry big risk.’ These are the stocks chosen from the companies that have shown rapid growth and are expected to generate rapid earnings over the next few years.
Defensive Portfolio Strategy
The other type of portfolio strategy is the defensive portfolio strategy. It involves the collection of stocks after carefully observing the trends such as market returns, earnings growth, and dividend history. In this, the investors are conservative about the investments and the type of strategy they are willing to manage their portfolio. The ones on the less risky side regularly balance their portfolio to maintain the intended asset allocation.
The strategy focuses on protection first and then focusing on growth. The investors who use this strategy look for stability and consistency.
Diversification is a Strategy
This type of portfolio strategy is about adding a wide range of securities to the portfolio. This is termed diversification by investing in different ranges. This is in the wake of the attempt to limit exposure to the fluctuations in any single asset. Usually, it is advised to have a mix of distinct investment segments that can help achieve higher returns with lower risk.
Moreover, diversification is the main component of the Modern Portfolio Theory (MPT). According to the theory of different investors, this is the best way to achieve better results by choosing the high risk and high return or low risk and low return asset classes. The investor doesn’t have to go for the over-diversification, which is when you have over 20 stocks in the portfolio. On the other hand, under diversification shouldn’t be practiced too that the mix has less than 3 stocks. The ideal diversification should follow the 8-20 stocks.
Non-Correlating Assets as a Strategy
The risk in the market is divided into two ways. The first one is the systematic risk, and the other is the unsystematic risk. The systematic risk can only be present and cannot be controlled by either the company or investors. On the other hand, the Unsystematic risk can be reduced by taking specific actions. Having a non-correlating asset is a breakthrough. In simpler words, the assets behave according to the market changes. Usually, they move in the opposite direction, showing an inverse effect. This will help cut down and balance the volatility in the overall portfolio.
For example, the recent dispute between the Russia-Ukraine war and its effects on two non-correlating assets, Gold and Stocks. This news has resulted in the biggest crash in the Indian stock markets in the last few years.
The benchmark indices (Sensex and nifty) went down 4.72% & 4.78%, respectively. On the other hand, commodities like gold increased by ₹2,250 to ₹52,630 per 10 gram while silver jumped 5% to ₹67,926.
Stop Loss order as a Strategy.
The stock prices are volatile and will move up and down depending on the market supply and the demand. The discovery happens when the bid price (by the buyer) and ask price (by the seller) meet at an equilibrium. Thus the prices move accordingly every millisecond.
As an investor, a single rupee change can bring significant change, which is loss or gain. In short, the investor must be more cautious toward such movement and make sure to get the best returns possible. One such way to be saved is by putting the stop loss. This way, an investor can exit an investment if the price moves to a certain level. The order is automatically executed when they reach the goal price set by the investors.
Dividends as a Strategy
One of the best parts of the stock market is generating two-way returns. The first is a capital appraisal, and the second is through stock dividends. When a company is in profit or a surplus, it gives out a portion of it to the shareholders in the name of the dividends.
Also, it is stated that if you invest in the companies that pay dividends is a proven method for delivering above-average returns. You can analyze and come out to find the best dividend-paying stocks.
For example, the dividend payment implies how much a company pays out in dividends each year. You can also consider the Dividend payout ratio, which shows what portion of the net income is being paid out as dividends. This strategy is adopted by the one who looks to generate another source of income.
Different types of investment strategies
Here are the different investment strategies that one can invest in and plan accordingly for the same.
How To Choose Your Investment Strategy
First and foremost, take a complete insight into your financial health. You have to take accountability for the money you spend and save, what is the=income you generate is, and any existing investments you may not realize you have.
Distribute the capital so that every segment is covered, and then you are left with the money to invest. The money left can be used for the investment, building your portfolio, and planning your expenses.
6 Types Of Investment Strategies
Here are the 6 types of investment strategies. These are divided based on the size of the investment and approach for the same. The best investment strategy is which drives the highest profits. There are different factors you need to consider before investing. The best investment strategy goes beyond searching for the one that yields the highest profits. There are so many factors that you need to consider. As preferred, one should look for the risk tolerance, the level of preferred activity, and the turnaround time. Here are different types of investment strategies.
● Short Term Investment Strategies
● Long Term Investment Strategies
● Active Investment Strategies
● Passive Investment Strategies
● Low-Risk Investment Strategies
● High-Risk Investment Strategies
1. Short-Term Investment Strategies
A short-term investment strategy is the one that provides the result in around 3 years. For example, there are wholesaling, high-interest savings accounts, short-term bonds, and cash management accounts. Usually, the investors drive towards the short-term investment as the returns are directed towards the faster returns. The factor to be considered in the short-term investment is the profitability as the turnaround is just for 3 years. Also, many investments don’t have much time to generate results, even if they are taken for the long term.
2. Long-Term Investment Strategies
A long-term investment is usually what comes to mind when investing in the stock market. These include investing in rental real estate, stocks, mutual funds, and gold or collectibles. The returns that are to be generated take over several years, as long as an investor chooses to stay involved in the market.
The strategies for long-term investment can be a great deal as this involves lower risk and higher returns compared to other investments. As stated, the capital will be locked up for an extended period, so the money is blocked for a longer period.
3. Active Investment Strategies
This is an investment that is done daily, and this is where the investor is regularly involved with the market. An example of active investment is stock portfolios, where the investor is engaged personally without the involvement of the financial institution or advisor.
This is great for those who want to grow their portfolio by themselves with the finances, whether it be the portfolio management or the assets.
4. Passive Investment Strategies
It is when the investors allow someone to intervene and manage their portfolio. It is like investors sit back while their assets make profits for them. This option includes the REITs index funds. Passive investment still requires much of the research. Even if there is no day-to-day involvement, one needs to intervene now or then. This is usually eyed as a way to supplement their regular income or save for retirement.
5. Low-Risk Investment Strategies
Talking about the low-risk investment strategies, it is an investment for all age groups. An investor will see some of the returns without touching the initial investment or risking a large capital. This includes purchasing bonds, CDs, and savings accounts.
Diversification is one big factor in low-risk investing —this is when you spread your capital into several investment types. The diversification of the portfolio safeguards against losing all of your funds if one investment does not perform well.
6. High-Risk Investment Strategies
Risk is a kind of a different word that is involved in various investment strategies and is referred to as the volatility of a given investment. Usually, people associate high risk with returns and profits, but this is not the case for everyone. The loss covering is easier for the young investors as they have time to invest and earn. Examples of high-risk investment strategies include investing in startup companies or “playing” the stock market.
Conclusion – Types of Portfolio Strategies
In conclusion, this article has covered the various types of portfolio strategies used by investors in their portfolios. While investing in the fluctuated market, it is important to set a goal and work accordingly. Also, following the goal, the strategies should be made and implemented. Moreover, if you want to know about the best portfolio management service provider, you can read the article “Best PMS in India.”