While savings are a great step on your wealth creation
journey, there’s more to it. Savings should be looked at as a boarding stage
for the crucial part of the journey. Investment is the point at which things
get exciting. Get it right and you will be in a position to smile at the
future. Miss the bus and you will live to rue the opportunity. Investment
happens when you use the savings you have collected to generate more money. It
is releasing your money into certain trusted instruments with the aim of multiplying
it. At the level of an investor, you are no longer working for money but
finding ways of making your money work for you. What are some of the investment
strategies you can deploy to get your money working for you?
Preparation
Before we delve into that, what are the signs that you are
ready for investment?
You are ready for investment if,
-You can afford to put money away
-There are no debt obligations bogging you down
-You have enough to cover your bills after investment
-You have a good risk tolerance
This is determined by a number of factors including Age,
goals, lifestyle, financial situation, expected returns, income and retirement
window. The young can take more risks, the old have no such luxury.
What is an investment
strategy?
A set of principles designed to help an investor achieve
their financial and investment goals. Some are conservative, others are highly
aggressive. They are not static and can be reviewed periodically so that you
adjust depending on your circumstances. The best strategies should help you
meet your financial goals and grow your wealth while maintaining a level of
risk that lets you sleep at night.
There are numerous strategies you can apply towards
investment. They include
1)
Value
investing. This is the strategy that Warren Buffet has employed to grow his
wealth through 6 plus decades. With this strategy you seek out undervalued
stocks of companies whose intrinsic value is greater than what the stock price
is saying about it. It works from the standpoint of how the market can be
irrational in assigning value to different stocks. This irrationality gives
investors unique opportunities to buy highly valued stocks at discounted
prices. This is a strategy for those who are keen on playing the long game.
With value investing you buy a business not just the hottest stock on the
market. It requires significant research, effort and patience to hack.
2)
Growth
Investing. Look for investments that offer strong upside potential when it
comes to future earnings of stocks. It involves evaluating the current health
of the stock as well as the growth potential. It is about looking at the
prospects of a stock before you buy it. You look at recent records to see
evidence of growth and whether what it deals in is something the public wants
and uses. It involves fundamentally analyzing financial statements and factors
about the company behind the stock.
You must be ready to analyze the management
prowess of the executive team of the company you are investing in. How does it
achieve its growth? Through business activity or borrowing? You must also look
at competitors to determine whether it is a dominant player with a competitive
advantage.
3)
Momentum
Investing. With this strategy buy stocks on an upward trend. The slogan is
buy high and sell higher. You are strictly driven by data and look for patterns
in stock prices to guide your purchasing decisions. According to Rob Arnott the
fees and expenses related to momentum investing negate the gains you would
expect to get from the stocks. This requires you to be constantly on, making
decisions about what to buy and what to sell. It can be labor intensive.
4)
Dollar
cost averaging. This strategy focuses on Making regular investments in the
market overtime. You choose a regular amount to invest every month. It is a
disciplined approach and you can use automated features that invest for you. It
saves you from the stress of market timing. When investments happen in regular
increments, the investor captures prices at all levels.
Keeps you committed to saving while
reducing the level of risk and effects of volatility. Not good for those with a
lump sum to invest. Ideal for those with little amounts to invest overtime. It
prevents spontaneous illogical behavior.
5) Other Worthy Mentions
Buy
and Hold
Time in the market is better than timing
the market. Assumption is that short term volatility will be corrected by long
term returns. This is considered lazy because of its passivity.
Core
and satellite
Buy a large index fund as the core element
of the portfolio and other little funds as satellites. This reduces risk
through diversification, achieves above average returns with below average
risk.
Tactical
Asset Allocation
A style where the three main asset
classes(stocks, bonds and cash ) are actively balanced to maximize returns and
minimize risk.
Best strategy?
I wish it was easy to point at one strategy that beats all
others. Unfortunately the answer to the question: what is the best strategy is
it depends. It depends on the amount of time you want to use in the process of
investing, what your end goal is, how much you have at hand to invest alongside
many other considerations. As such, you should choose a method that resonates
with you and keep adjusting through the different seasons of your journey. What
strategy do you think you are going to use on your investment journey and why?
Financial Literacy Open Day coming up on 26/03/2022 at Hotel
Green Court Latema Rd. purpose to be there and invite many to come alongside
you.
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