Your capital is at risk. All investments carry a degree of risk and it is important you understand the nature of these. The value of your investments can go down as well as up and you may get back less than you put in.
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There’s more to investing than picking which shares and funds to buy. Many seasoned investors will consider various investment strategies to help them achieve their overall financial goals.
The main investment strategies include:
- Value investing
- Growth investing
- Momentum investing
- Pound-cost averaging
- Core investment strategy
- Should I invest overseas?
This is module one of investing for intermediates, a course giving you practical tips for investing.
Capital at Risk. All investments carry a varying degree of risk and it’s important you understand the nature of these. The value of your investments can go down as well as up and you may get back less than you put in.
Investing for Intermediates, Investment strategies
Best investment strategies
There are many investment strategies that can help give your portfolio an edge. There is no right or wrong answer on which approach to take, just as there is no guarantee that your investment will go up and may in fact go down.
The best investment strategy for you will depend on factors such as your knowledge of different markets and sectors, your investment time horizon, and your attitude to risk.
Below, we explain some of the main strategies to consider.
1. Value investing
Value investing is where you buy shares in companies that have fallen out of favour with other investors but appear to you to be undervalued.
Based on your knowledge of the market and your experience, you think the shares look cheap, and that you will be buying them at a bargain price that does not reflect the company’s long-term potential.
The hope is the share price will rise over time as other investors come to see the company’s true value.
Undervalued shares: Example
Some analysts believe British stocks were undervalued in 2021, with their share price not reflecting the value of their assets.
An example of a company believed to be undervalued is tobacco firm Imperial Brands.
The firm is a top dividend payer, with yields of around 8.5%, and has a low price-to-earnings ratio of 6.7%, according to Hargreaves Lansdown*.
Analysts say customers are loyal to its brands and the company is expanding beyond traditional tobacco products, with strong growth potential.
Pros of value investing:
- The potential exists for huge rewards.
- If you buy unloved stocks, it is likely to be a long-term investment, meaning you may benefit from compounding. This is where the returns you earn from your portfolio are boosted by the returns generated in previous years.
- Investors must be prepared for volatility, as the company’s share price could fluctuate for many years.
- It takes a lot of time to properly research and choose companies you think are undervalued.
- It is a strategy more suited to sophisticated investors who have knowledge of how to measure value.
- There is no guarantee the company will be a success.
- The company may even go bust and you may lose all the money you have invested.
- To minimise risk, you could buy into a fund that invests in a selection of “value stocks” – to reduce your exposure to any one company.
See here for information on how to choose an investment fund.
2. Growth investing
Growth investing is where you back companies that you believe have the potential to grow rapidly and compete with other larger rivals in the sector. The aim is to one day sell your shares for a bigger price than what you paid.
Growth investing is the opposite of value investing. This is because you are picking companies that may already be popular with consumers and investors, but you believe they have the potential to go further.
Growth stock example:
Tech stocks are often included in examples of growth stocks.
For years, online retail giant Amazon has been one of the most successful growth stocks. After a year of troubled earnings reports it is undergoing major restructuring. Plans include cutting around 27,000 employees from its workforce.
Pros of growth investing:
- The company has a strong track record of success.
- You may get regular payouts through dividends.
- You may be too focused on a certain sector, leading to a lack of diversification.
- Growth companies typically will not pay dividends to shareholders, but instead reinvest the profits. So you shouldn’t expect an income from growth stocks.
- The company may have peaked already and be overtaken by rivals in future, meaning the value of your investment could drop, or be lost entirely.
Looking for investment ideas? Check outHow to invest £50,000 and how to invest £10,000.
3. Momentum investing
With momentum investing, the aim is to sell losers and buy winners. It is a more short-term approach to investing, as you are likely to sell as soon as the stock shows signs of falling.
The money you make from selling shares is then invested in companies you believe are on the rise.
There are momentum-style exchange-traded funds (ETFs) that will invest in many companies on your behalf. An example is the iShares Edge MSCI World Momentum Factor UCITS ETF.
Pros of momentum investing:
- You are unlikely to stick with a poorly performing company out of loyalty.
- You are likely to own a diversified range of stocks, because you may be looking for any company on the rise, regardless of what sector they are in.
- It takes a lot of time to research the markets for someone who is constantly looking to sell and buy.
- It is a strictly data-driven approach to investing and it requires skill and experience too.
- You are likely to react quickly to economic data and other short-term events, and it may not turn out to be the right decision. This could cause your investment to go down, or be lost entirely.
4. Pound-cost averaging
Pound-cost averaging is a flexible investment strategy.
It means you drip-feed money into investments over time – perhaps a small amount each month – rather than a lump sum in one go. The idea is that you aren’t at the mercy of stock market volatility.
For example, if you are only putting small amounts in at any one time, you won’t be over-exposed if share prices plunge soon after.
There is also a smoothing effect: while shares will cost more if the markets are doing well when you buy, they will also be cheaper during a downturn.
Pros of pound-cost averaging:
- You don’t need lots of money to start with.
- Regular small amounts can be paid in.
- You can set up a direct debit, so you don’t have to think about it.
- You are likely to be less exposed to short term market volatility, as you are investing small amounts at a time.
- You may miss out on the full impact of rises in the short term as you have invested a smaller sum of money at the start.
- This strategy could lead to lower overall returns. Pound-cost averaging works well if you are making regular investments from your spare cash. But if you have a lump sum that you can invest for at least 5 years, you may benefit more over the long term from investing all your money in a diversified portfolio at once, because there is a longer timeframe for compound growth.
The Power of compound interest: The table below shows how investing monthly contributions into the Legal & General UK 350 Index fund can grow over time.
|Monthly contributions for 5 years
|Monthly contributions for 10 years
|Monthly contributions for 20 years
5. Core investment strategy
What is a core investment strategy? In its broadest sense, it focuses on a core set of investments held in a long-term portfolio.
The term “core investment” can often relate to real estate or property investment, because these are typically long term investment strategies.
Core investment is a common strategy among high-net-worth individuals and institutional investors (organisations that invest money on behalf of individuals) looking to acquire and operate commercial properties. As such, the strategy is generally only suitable for a specific type of investor.
Investors will typically pick high-quality, leased properties in thriving global cities such as London or New York. The focus is on regular returns from rent, rather than relying on the property itself to rise in value.
Pros of core investment strategy:
- This tends to be a long-term investment approach focused on the chances of future growth.
- The strategy offers diversification opportunities as it allows investors to back commercial properties worldwide.
- Returns can be stable, as properties are likely to be let out on a long-term basis.
- There are opportunities for passive returns without much involvement, if you receive regular money from rent.
- This investment strategy targets low to moderate returns of up to 10%, as investors concentrate on properties that generate stable and consistent rental income. So it may not be suitable for investors looking for high-growth
- It is a long-term investment, and it may be difficult to withdraw your money quickly.
- The sector may be exposed to disruption in the wider economy. For example, a recession could leave companies struggling to pay rent
- The coronavirus pandemic has prompted a rising number of people to work from home. Around 30% of adults work from home at some point in the week, says the ONS. This could lead to fewer companies seeking office space long-term – reducing the amount of rental income an investor may receive.
Should I invest in the UK or overseas?
In order to achieve a diversified portfolio, it may be worth thinking global as there are many potential benefits of investing overseas.
The UK is just one major economy, and there are many other opportunities in Europe, Asia and the US for investors. Just three of the world’s largest 100 companies are based in the UK, according to Forbes.
“It is not just about quantity – or even quality – you need variety to succeed when investing. Make sure your portfolio includes investments in a range of countries, types of industry, asset classes and styles,” says Emma Wall, head of investment analysis and research, Hargreaves Lansdown.
To invest in companies overseas, you can buy shares in these companies directly through a UK broker such as Hargreaves Lansdown*.
You don’t need to hold foreign currency, as all overseas shares will be converted into pounds when you deal.
However, there is likely to be a foreign exchange charge, on top of any dealing charges. We explain more about investment fees here.
Another way to get exposure to global companies is by investing in a mainstream fund or investment trust. Both these may invest in many companies worldwide, allowing you to get global exposure for minimal costs and effort than if you would invest in individual companies on your own.
If the prospect of allocating money to different geographies seems overwhelming, you can go for a broad fund such as Fidelity Index World, which invests across all developed stock markets.
Nonetheless, there are some benefits of domestic investment.
Though past performance is not an indicator of future results, the UK stock market has a long tradition of companies paying generous dividends. This is attractive to both investors looking for long-term growth and those seeking a regular income from their investments.
It’s also worth bearing in mind that many companies listed on the FTSE 100 make a significant amount of profit from overseas sales. So the FTSE 100 is a fairly international index anyway, although the FTSE 250 is a more UK-focused index.
|Top 10 FTSE 350 stocks by performance
|Percentage growth(year to date)
|Watches of Switzerland Group
|Ultra Electronics Holdings
How to build a socially responsible investment portfolio
Ethical investing means you concentrate on projects and companies that have a positive impact on the world while making a profit for investors.
You could pick your own stocks, or invest in an ethical fund that filters out unethical companies or finds the best socially responsible investments. Find out more about ethical investing here.
Next in our Investing for Intermediates course: Market trend analysis
Investing for Intermediates: the course
- Investment strategies
- Market trend analysis
- How to pick stocks
- Investing in dividend stocks
- Property investment strategies
- Alternative investments
*All products, brands or properties mentioned in this article are selected by our writers and editors based on first-hand experience or customer feedback, and are of a standard that we believe our readers expect.
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As an experienced investor and enthusiast in the field of finance and investment, I've delved deep into various investment strategies and financial concepts. With a solid foundation built on years of practical experience and continuous learning, I can confidently discuss and analyze the concepts presented in the article you provided.
Let's break down the key investment strategies and concepts outlined in the article:
- Definition: Value investing involves buying shares in companies that are undervalued according to certain metrics, with the expectation that their true value will be recognized by the market over time.
- Example: Imperial Brands is highlighted as an undervalued stock due to its low price-to-earnings ratio and strong growth potential.
- Pros: Potential for significant rewards, benefits from compounding over the long term.
- Cons: Requires extensive research, sophisticated understanding of valuation metrics.
- Risks: No guarantee of success, potential for loss if the company fails.
- Definition: Growth investing focuses on companies with high potential for future growth, often characterized by rapid revenue and earnings growth.
- Example: Amazon is cited as a successful growth stock.
- Pros: Potential for capital appreciation, possibility of regular dividends.
- Cons: Lack of diversification if too focused on specific sectors, reliance on future growth potential.
- Risks: Risk of overvaluation, competition, and potential decline in growth prospects.
- Definition: Momentum investing involves buying assets that have performed well recently and selling those that have performed poorly, based on the belief that trends will continue.
- Example: iShares Edge MSCI World Momentum Factor UCITS ETF is mentioned as an example of a momentum-style ETF.
- Pros: Avoids loyalty bias, potential for diversified portfolio.
- Cons: Requires continuous market research, data-driven approach.
- Risks: Susceptible to short-term market fluctuations, potential for incorrect timing.
- Definition: Pound-cost averaging is an investment strategy where you invest a fixed amount of money at regular intervals, regardless of market conditions.
- Pros: Lower entry barrier, reduces market timing risk.
- Cons: May miss out on short-term gains, potential for lower overall returns.
- Risks: Lower returns compared to lump-sum investing in certain scenarios.
Core Investment Strategy:
- Definition: Core investment strategy involves holding a core set of long-term investments in a portfolio.
- Example: Investing in high-quality, leased commercial properties in thriving global cities.
- Pros: Focuses on long-term growth, offers diversification.
- Cons: Moderate returns compared to high-growth strategies, illiquidity.
- Risks: Exposure to economic disruptions, sector-specific risks.
Investing Overseas vs. Domestic:
- Importance of diversification through global investments.
- Consideration of benefits and risks associated with investing in different economies and regions.
Each of these strategies and concepts offers unique opportunities and challenges, and the suitability depends on individual investor goals, risk tolerance, and market conditions. It's crucial for investors to thoroughly understand these strategies and their implications before making investment decisions to mitigate risks and maximize potential returns.
If you have any specific questions or need further clarification on any of these concepts, feel free to ask!