How to choose the best investment strategy for you
Investing in stocks gives you ownership of the physical shares. Here, we run you through some popular investment strategies, and we explain the differences between investing and trading.
A buy-and-hold investment strategy involves buying a stock and holding it for a long period of time, despite any fluctuations in the stock’s value. When using this strategy, you’d believe – based on your own fundamental and technical analysis – that a company’s stock stands a strong chance of appreciating in value over time, despite its current value.
‘Buy-low, sell-high’ strategy
A ‘buy-low, sell-high’ investment strategy is similar to a buy-and-hold strategy. The key difference is that a ‘buy-low, sell-high’ strategy aims to buy shares when they are undervalued and sell them when they achieve their true market value. This is opposed to a buy-and-hold strategy, which is less concerned with the price at which the shares are purchased. Fundamental analysis can help you to identify whether a stock is undervalued based on company earnings, leadership decisions, and technical innovations that could cause the stock price to increase in the future.
Breakout investment strategy
A breakout investment strategy means that you’ll wait until the price of the underlying stock has broken through a level of historic resistance before opening an investment position. A resistance level is used in technical analysis, and it represents the historic ‘ceiling’ of a stock’s value. If the price breaks through this level, then it could be an indicator that the stock will reach higher highs in the future.
How to choose an investment strategy
There are several factors to consider when you’re choosing your strategy. You’ll want to consider how you might achieve the best returns over time, as well as the potential risk to reward ratio – coupled with your own risk appetite.
How have investors made the best returns over time?
The best returns over time have been made by investors who choose to spend time in the markets, rather than those who attempt to time the markets.
‘Time in the markets’ is a long-term buy and hold strategy in which investors seek to maximise their profits by maintaining a position for a long period. Statistics show that a buy-and-hold strategy offers a chance to achieve the best returns over time – as shown by the ‘FTSE 100 total return’ in the graphic below.
Investors seeking to ‘time the markets’ will be effectively looking to buy low and sell high. For example, many investors were able to cash in on the sudden drop that coronavirus caused to stocks around the world, buying for a fraction of the shares’ true value only to sell their positions once markets began to recover.
Carry out your own research before investing
Perhaps the most important thing to bear in mind before investing is that there is no one ‘right’ time to invest. You should carry out your own analysis – both fundamental and technical – for each individual company that you want to take a position on, and you should use this data as evidence to support whether now is a good time to invest in a company’s stock or not.
You can also use our stocks screener to help you identify potential investment opportunities. Follow the steps below to get started investing in shares:
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