Basic investment strategies

Investment strategies are a plan for how to save money to help it grow. Sometimes this can just be a plan for trading stocks, but it really means much more.

Liquidity, risk and potential return

All investments balance liquidity (how easily it can be converted into cash for other uses), risk (the chance of the investment losing value) and potential return (how quickly your investment can grow). The balance between these three items is up to your own individual taste, but it is this balance that determines the type of investment you choose.

Asset class

Asset classes are what you hold as investments. These can be a very wide range, but any complete portfolio should have a mix of a couple of different asset classes.

Cash and bank deposits

Liquidity: Very high Risk: Low Potential growth: zero or negative Cash, believe it or not, is an investment in itself. Cash, and bank funds you can withdraw directly, are the most liquid assets, because liquidity is basically how quickly you can turn an investment into cash. Being able to always use cash for whatever you want is valuable. That’s why emergency funds exist as cash and bank funds, not as gold bars. On the other hand, cash does not grow and lose value over time due to inflation.

Certificate of deposit

Liquidity: Low Risk: Low Potential growth: Low A certificate of deposit is like a savings account with a locked-in interest rate, but you can’t withdraw the cash for a certain period of time. They are very safe investments, but on the other hand they have a very low growth potential.

Stocks

Liquidity: High Risk: Medium Potential Growth: High Stocks are usually what comes to mind when you think of investing. In terms of an investment strategy, mutual funds and ETFs that hold stocks are the same thing – buying a piece of one or more companies in exchange for a share of their profits.

Bonds

Liquidity: Medium Risk: Low Potential Growth: Medium Bonds come in three varieties, corporate bonds, government bonds and other government bonds. Unlike stocks, a bond is a loan that you make to a company or government, and they have to pay it back plus interest. Corporate bonds from large companies and government bonds are usually very safe investments (and so there is a lower rate of return), but there are also Junk Bonds, or bonds that have a higher risk of not being paid back in full. In exchange for the higher risk, organizations that sell junk bonds offer higher interest rates to people who buy them.

Real estate

Liquidity: Low Risk: Medium Potential growth: Medium Real estate includes land and buildings. Until fairly recently, the bulk of retirement savings was in the form of the house you lived in. People would buy a house and hope the value grew enough over the next 30 to 40 years to sell it and use the profits for retirement. Others buy damaged or discounted houses and repair them, then sell them for a profit (this is known as house flipping). Since the housing crash of 2007, people are more cautious about investing in real estate, but owning a home is still a very popular investment.

Precious metals

Liquidity: High Risk: Medium Potential growth: Medium This includes buying gold and silver. Many investors try to buy gold and other precious metals as an investment (and to protect against inflation), but this has also backfired in recent years as a ‘gold bubble’ popped, making the prices of the metals more volatile than before. However, holding precious metals as a hedge against market uncertainty in other security types is still very popular.

Derivative

Liquidity: Medium Risk: High Potential Growth: High Derivatives that normal investors can buy include stock options and futures. Being a derivative means that it gets its value from something else. A stock option has value because the stock it lets you buy has value (but the contract itself is worthless if you don’t use it). Futures are good for commodities like oil that are delivered at a future date. Derivatives are most useful for hedging (like buying a stock option for a stock that you think will go up in value, but you don’t necessarily want to buy right now).

Tips and tricks

Years ago, a common piece of investment advice was that if you were building an investment strategy for retirement, a large portion of your savings would be held in your house, which will increase in value with market interest rates. For the rest of the assets, financial planners would recommend balancing your assets between stocks and bonds according to your age. Basically, take 100, subtract your age, and that should be the percentage of your portfolio in stocks (with the rest in bonds). That means an 18 year old would have 82% of their savings with 18% in bonds. This advice is a bit outdated, but it has a couple of important kernels of wisdom that all investors should be aware of.

Don’t put all your eggs in one basket

Always have a diversified portfolio, both in terms of the types of securities and the stocks and bonds you choose! Diversify at a few different levels. Divide your assets between a few different security types. In the classic example, the saver would have around 50% of their savings stored in real estate, with the remaining 50% split between stocks and bonds. This means that if there is a fall in house prices, they are protected by having lots of savings in shares and bonds. If the stock market starts to fall, they are still okay because they have their houses and bonds. The value of bonds is determined by the prevailing interest rates, so they are insulated from this too with their other security types. On the other hand, they also benefit if there is a rise in house prices, stock prices and interest rates.

Use an evolving portfolio

The old adage of “more bonds as you get older” is based on the idea that as you approach retirement, your portfolio should become more conservative. If you have tons of stocks that lose value when you’re 25, you still have 40 years of income to make up for it. If you have a lot of stocks that lose value when you’re 62, it will be much harder to make up that income.

Common investment strategies

If you’re ready to start investing, there are a few key strategies to consider. Most long-term investment strategies are based on one, or a combination, of these.

Buy and keep

“If you’re not willing to own a stock for ten years, don’t even think about owning it for ten minutes.” – Warren Buffet

The buy and hold strategy is based on the idea that you do extensive research on what you are buying, choose your investments for solid long-term reasoning, and then buy it and hold on to it, no matter what the market price does. The only time to sell is either: – When the underlying reasons why you bought the stock change (like the company’s management changing to a team with a different business strategy that you don’t like), or – When you plan to exit the market completely Warren Buffet is widely considered the most famous buy-and-hold investor.

The disadvantages

“The market can remain irrational longer than you can remain solvent.” – John Maynard Keynes

Even if all your research is fantastic, and even if what you invested in recovers all its value in the long run, you still have a deadline for when you need that money to live on in retirement. You also have a very real chance of just being wrong in your choice, and with a Buy and Hold strategy, you can take a huge loss before admitting defeat.

Value investment

“Know what you own, and know why you own it.” – Peter Lynch

Value Investing looks for stocks that are undervalued compared to the rest of the market. That means looking for companies that look like they’re growing strongly but haven’t yet attracted much market attention, or new entrants with solid fundamentals and potential for growth. You will buy and sell shares more often with value investing – as soon as your picks start to look ‘priced in’ or ‘overvalued’ you will start to think about selling and moving on. Peter Lynch became famous through his use of Value Investing while acting as the lead manager of Magellan Fund Fidelity Investments.

The disadvantages

“The four most expensive words in the English language are “This time it’s different.” – Sir John Templeton

Value investing requires you to pay close attention to companies and reassess how much you think they’re worth regularly. If you’re wrong a few times in a row, you may have trouble bouncing back.

Active trade

“Understanding the value of a security and whether it is trading above or below that value is the difference between investing and speculating.” – Coreen T. Sol

Active trading is when you buy and sell shares regularly. Day Trading is when you buy or sell on the same day, trying to take advantage of market fluctuations to earn a profit. Active trading requires more advanced knowledge of chart patterns, fundamental and technical analysis and an appetite for risk. In exchange, you can make huge returns with active trading by riding market trends.

The disadvantages

“The individual investor should act consistently as an investor and not as a speculator.” – Ben Graham

Active trading can bring big returns quickly, but it can bring big losses even faster. Most professional investors and financial advisors suggest using only a very small part of your portfolio for active trading, as the damage can be difficult to repair.

About the Vikingen

With Vikingen’s signals, you have a good chance of finding the winners and selling in time. There are many securities. With Vikingen’s autopilots or tables, you can sort out the most interesting ETFs, stocks, options, warrants, funds, and so on. Vikingen is one of Sweden’s oldest equity research programs.

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