Any investment strategy you choose should be based on your personal financial circumstance and long-term goals. But, to devise such a strategy, you need to assess your risk tolerance and learn a bit more about the range of investment tools and strategies out there.
Buy-and-Hold
Buy-and-hold investing is the act of buying a financial instrument for a duration of several months, a year or even longer, making the most of the long-term growth potential of the investment. This method helps investors not to be swayed by investment decisions based on short-term market fluctuations, encouraging patience and rationality in decision-making.
This approach also means that trading happens less frequently, thus minimising frictional costs such as brokerage fees. While requiring less monitoring of your portfolio than active strategies, it remains a good idea to periodically check in on your portfolio versus your investment objectives, as well as changes in market conditions.
Buy-and-hold doesn’t guarantee profits in all market environments, but it exploits the long-term rise of stock markets in order to deliver it overall, and with lower volatility than trying to time the market yourself. While it can leave you exposed for setbacks and have you stick with it through times of portfolio decline, they’re still a far better alternative than more gamble-like investments such as short-term trading.
Dollar-Cost-Averaging
While dollar-cost-averaging can ameliorate the risk of investing in an item when it’s overpriced (you regularly buy more when prices are low, fewer when prices are high) it doesn’t prevent you from losing on investments that value falls or markets decline over your investment time horizon.
This approach also minimises your stress, since it frees you from trying to profit from market rallies and from trying to avoid market downturns. It could work well for novice investors with limited resources who want to invest in an asset class where price moves have been historically large.
At the same time, note that the art of predicting market bottoms isn’t easy. And obsessing about them can so diminish your expected return profile as to make it a sub-optimal strategy. You really need to be able to ‘buy the dips’ or through fluctuations without cripping your account, or significant life changes, like a marriage or childbirth, forcing a break in the programme. Automating the process with some sort of Systematic Investment Plan, or Dividend Reinvestment Plan (DRIP) can make regular investing much easier.
Diversification
Diversification can help to reduce risk since you’ll be investing across asset classes, sectors and geographies. Diversification may not eliminate the risk, but it can significantly reduce your sensitivity to volatility and shake-outs in the financial markets and the economy.
Spreading your money across stocks, bonds, real estate and cash, with different kinds of assets Diversification Most people’s portfolios are made up of stocks, bonds, real estate and cash, with these diversifiers making use of different ‘asset classes’: stocks, bonds, real estate and cash. Each of these asset classes typically has different risk/return profiles, and are often negatively or at the very least not tightly correlated with one another, so that if one is down another could offset the damage to your portfolio.
Portfolio diversification is a complex theme that is influenced by several factors such as your risk profile, investment goals and timeline. Periodic review of your portfolio’s allocation by an adviser and subsequent rebalancing is an essential part of an effective diversification process that can help you stay on course to achieve the desired asset allocation, cope with volatility in markets and enhance returns.
Rebalancing
Rebalancing refers to the practice of periodically selling part of your investment and investing in others to return your portfolio to the initial model determined by the weights of its constituent assets. Investors rebalance their portfolios because doing so allows them to get more exposure to less risky assets.
For example, if your portfolio originally had 60 per cent stocks and 40 per cent bonds, over time, as the performance of the stock market has accelerated and bond funds have lost a bit of their value, your portfolio has come to be dominated by shares so that they now outweigh the bonds by a wide margin.
Rebalancing will put this right by compelling you to sell some of your best-performing stocks and buy bonds, thereby returning your portfolio closer to the asset allocation that you initially set for it. For example, a systematic approach to rebalancing can frequently be done using rules with tolerance bands (fixed or relative bands will determine when to rebalance) to advise you on when to rebalance your portfolio, helping you save on both cost and time in the event of market volatility spiking.
