7 Investment Strategies You Should Know About

Which criteria should investors use when choosing an investment strategy? These seven basic strategies are exceptionally popular among investors. Get to know each strategy in this overview from moneyland.ch.

1. Value

Value investors invest in companies which may be undervalued on the stock market, meaning their stock prices are lower than their real value. Investors who follow this strategy primarily aim to determine the real economic value of companies using fundamental analysis – based on business reports and market research, for example.

Value investors buy stocks which they consider to be undervalued. This is done in the belief that the stock price will eventually go up to match the true value of the company.

The relationship between a company’s stock price and its profits is a key indicator for value investors. You can calculate the price-to-earnings ratio (P/E) of a company by dividing its share price by its profit. A low P/E ratio means that the company earns exceptionally high profits. The lower the P/E ratio is, the more interesting that stock is for value investors.

The long-term performance of the value strategy is higher than average. However, investors must be prepared to invest over a long time frame. Value investors follow the buy-and-hold principal. They buy assets at a favorable point in time and keep those assets over a long period of time – often for several decades.

2. Growth

As with the value strategy, the growth strategy is based on fundamental analysis. But growth investing focuses on a company’s potential for future growth rather than on its current earnings and intrinsic value.

Growth investors often focus more on entire industry sectors or markets which they believe may grow exponentially in the future, rather than on individual companies and stocks. They invest in stocks which allow them to tap into this potential growth.

The growth strategy is popular and successful. However, a form of extreme growth investing (growth at any price) is often considered to be a possible cause of speculative bubbles. When investors pump capital into a market without considering the real economic value of the company, the stock price can become grossly inflated in relation to the company’s actual value.

If the company or market does not grow enough to close the gap between real value and stocks prices, there is a risk of stock prices collapsing. To avoid this risk, growth investors have increasingly begun to consider the intrinsic value of companies so that investment does not exceed real growth expectations. This more careful approach is called growth at a reasonable price.

3. Momentum

One of the many popular stock market sayings says that “the trend is your friend.” The momentum strategy is modelled around that theory. Momentum investors believe that the prices of a stock which is currently experiencing a wave of popularity will likely continue to rise over the short-term. They invest in assets which have already begun to gain in price.

Chart analysis plays an important role in the momentum strategy. Investors track the momentum indicator of the securities they are interested in. The momentum indicator compares the current stock price with the average stock price over a given historical time frame.

The momentum indicator lets you determine how strongly a stock’s price has move upwards or downwards to date. Analysts use this indicator along with other technical information to try to determine which stocks are particularly worth investing in and when the trend is likely to reverse.

During periods of economic downturn in particular, momentum investors may achieve higher returns than conventional buy and hold strategies. The disadvantage is that a great deal of know how is required for successful momentum investing. Additionally, chart analysis – and therefore momentum strategies – is relatively unreliable.

4. Countercyclical

This strategy is the exact opposite of the momentum strategy. Countercyclical investors aim to trade against the trend. They buy stocks when prices are falling and sell stocks when prices are going up.

People who invest using this strategy contradict the majority of stock market investors. For this reason, they are often referred to as contrarians.

The strategy aims to use the stampede phenomenon to the investor’s advantage. For example, a panic which causes a stock selloff may be seen by anticyclical investors as a good occasion to buy stocks at a discount.  

Anticyclical investing is considered to be very risky because success depends on the contrarian accurately determining the stock price’s highest and lowest points. If a stock’s price continues to go down for a long period after you buy in, it can take very long before the price climbs back up to where you can make a capital gain. If it does not recover, you could make a capital loss.

5. Dividends

Investors who follow the dividend strategy invest in stocks which pay out high dividends. These are primarily stocks with annual dividends which are high in relation to the share price.

The advantage of this strategy is that investors can profit from stocks without having to sell them. This is beneficial if you are not interested in accreting investments and will not reinvest the profits in the same asset.

The disadvantage of the dividend strategy is that it does not optimize overall returns, which are made up of both dividends and capital gains. Typically, the share price will go down when dividends are paid out, so that the profit you make from the dividend is accompanied by a loss in the stock’s value.  

In Switzerland, there are tax disadvantages to using the dividend strategy. Dividends are considered taxable income and are subject to income tax. Capital gains, on the other hand, are not taxable for many investors – and when they are taxable, capital gains tax only applies when stocks are sold.

6. Index

The index strategy is a passive investment strategy. Instead of investing in individual stocks, index investors invest in whole stock market indexes – using exchange traded funds (ETFs) for example. ETFs replicate entire indexes like the Swiss Market Index (SMI), the Deutschen Aktienindex (DAX), or the Dow Jones index by buying all the underlying stocks or other assets in proportion to their weighting in the index.

Those who invest in indexes believe that the overall value of the stocks tracked by the index will increase – as has been the case with all major stock market indexes in past decades. The risk is minimal, because these indexes track entire markets or sectors. Investors benefit from broad diversification.

Another advantage is that passive investing generates less costs than active investment strategies. This is particularly true when investors apply the buy-and-hold principal and do not frequently buy or sell ETF or index fund shares. A moneyland.ch comparison showed that the cost of buying ETF shares varies broadly between service providers.

The disadvantage of the index strategy: It is completely useless for investors who hope to achieve higher-than-average performance. The investment performance can never exceed the performance of the index used. On the flip side, investment losses cannot exceed the losses of the underlying index.

7. Large caps

Some investors choose stocks to invest in based on the size of companies. They use market capitalization (often shortened to market cap) as a reference. The higher the market capitalization of all shares making up a company’s stock, the bigger the company is.  

Large cap investors concentrate their investments on the biggest companies (often referred to as blue chips). Many of these companies are considered to be exceptionally stable. Investors take on relatively little risk when they invest in these stocks. The probability of experiencing a complete loss is exceptionally small for blue chip investments.  

But the stability of these stocks also means that gains in share prices tend to be small. The chance of explosive growth is generally very small in the case of large, established companies. Large cap investors generally do not expect high returns on their investments.

Small caps are the exact opposite of large caps. Small companies generally have much more potential for growth, but small cap stocks also bear a higher risk of loss. Investors who focus on small caps generally make use of the value or growth strategies.

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