When you talk about investment strategies, you are opening a bottomless can of financial worms. Because they are limitless (not to mention a little slimy at times), and the categories into which they fall are vast and complex.
Each investment category – stocks, real estate, collectibles, gold, etc. – further breaks down into myriad sub-categories, leaving the investor with more alternatives than they probably have funds to try them all.
Nor should you try them all
Because the idea in nailing down an investment strategy is to eliminate those paths that don’t match well with your personal financial goals, and then to evaluate the viable options for specific features and benefits that optimize the critical balance between your objectives and your tolerance for risk.
One of the first decision you need to make in the arena of investment strategies is to clarify your short versus long-term objectives. Because the degree of inherent risk varies widely, as do your specific actions when the market moves.
Thinking Long Term
Long-term investors pick stocks based on the strength and future prospects of specific companies, and generally hold their investments through the thick and thin of economic swings and market surges. They may also augment their stocks with less liquid investments – bonds, certificates of deposits, even some real estate and gold – with the knowledge that they won’t need to access these funds until the end of their investment plan, usually years down the road.
As Far as the End of Your Nose
Shorter-term investors, however, take a much different approach. They are looking at current market conditions and influencing factors every bit as much as the company itself, hoping to buy low and sell high based on the movement of the market.
This could include sophisticated techniques such as short selling and options trading, and using margin to leverage their buying power by borrowing against the equity in their account to accumulate even more stock.
Some investors study these strategic alternatives for years, some get graduate degrees in it, and some go into the business full time in pursuit of the discovery of the perfect investment strategy.
In Pursuit of the Perfect Strategy
But at the end of the day, the only perfect strategy is one that allows the investor to reach their specific goals, which are formed and acted upon based on an informed understanding of near versus longer-term needs, and in light of one’s tolerance for risk.
Because regardless of the strategy, the investor can’t have it both ways. The quicker and higher the return desired, the greater the risk required to put yourself into a position to make it happen.
Conversely, the goal of more modest return can give you peace of mind knowing your risk – which his always present, no matter what investment alternative you choose; even bank deposits carry a risk of eroded buying power because of inflation – tolerance level is at a minimum.
The downside here is that you may not be able to seize profit opportunities in the short run. For example, your stock may surge, but selling it to seize that profit may violate your long-term strategy while creating tax consequences.
A Little Help From Your Friends
The creation and management of investment strategies is the province of professional advisors – stockbrokers, financial planners, bankers and accountants – who can help you wrap your head around the variables and risks.
Or, you can step into this world on your own. But if you do, remember that you’ll be standing toe to toe with the pros. The good news is, if you do your homework, if you know yourself well and if you are disciplined enough to stick with your strategy, you stand every bit the chance that they do of success.
