Investment strategies

Interest rates on cash savings have been dire for ages, offering a pitiful return on money held in savings accounts. In fact, when you take into account the effects of inflation, most money held in cash savings accounts will have gone down in real value in recent years. In the longer term, investing offers the chance for much better returns. And it’s best to have a clear investment strategy in place that aligns with your circumstances, goals, and attitude to risk. We explain more about investment strategies and how to choose the right one for you.

What is an investment strategy?

Investment strategy is a fancy way of referring to a plan, or way of thinking, that shapes how you invest. The best strategy for you will depend on your personal circumstances, your attitude to risk and your goals. For example, the right investment strategy for a young person willing to take high risk in exchange for high growth might not be appropriate for a risk-averse investor later in life.

Do I need an investment strategy?

One approach to investing is, of course, to simply pick individual stocks and shares on a whim. But this isn’t terribly strategic and, sadly, basing your investment selections on gut feeling, or in an even more haphazard manner, is unlikely to reap rewards in the long term.

Of course, even with the right strategy, investments carry risk. The value of investments can go down as well as up. But choosing, and sticking to, a strategy that’s based on clear guidelines, should help you ride out any short-term stock market volatility and see you right in the long term.

At the most basic level, you’ll need to choose the type of investor you want to be. For example, do you want to be a “buy-and-hold” investor, where you seek out investments (shares or funds) that you think will perform well in the long-term, keeping your investments in place even in the face of short-term declines. This approach is reliant on you making solid choices upfront, but can result in decent returns for your investment over time.

The alternative is to take a more active approach, where you trade frequently to capitalise on market fluctuations. Or, of course, you can adopt a combination of the 2 approaches.

Within these 2 approaches there are a number of potential strategies around the specific investments you choose.

What are the different types of investment strategy?

Arguably, there are as many strategies as there are investors. Everyone’s circumstances and goals will be slightly different. But most investment strategies will fall into one of a few main categories, including:

• Index investing. A passive investment strategy that looks to replicate the returns of a benchmark index, such as the FTSE 100.
• Momentum investing. With this strategy, investors buy stocks in companies that have already gone up, on the basis that they will continue to do so.
• Growth investing. This focuses on fashionable companies that are expanding quickly and posting strong profits, with (in theory) high future earning potential – or growth.
• Value investing. The opposite of growth investing, investors seek out unfashionable bargains which they believe are trading at a low price relative to their true value.
• Contrarian investing. These investors like to buck trends and go against the crowd in their choice of investments. They avoid markets that most people think are at their peak, theorising that there’s no further opportunity for growth. They would never opt for the same options as momentum investors.
• Income investing. These investors prioritise short-term income over potential growth. They typically focus on shares in big, stable companies that pay dividends.

You may also come across something called “dollar-cost averaging”. This is less about what you invest in and more about how often and how much you invest. It can be used in combination with any of the strategies above. We’ll delve into this, and each of the investment strategies above, in more detail below. Some investors personalise their strategies by combining multiple strategy types.

What is index investing?

This is a form of passive investing, typically in funds. Funds contain a range of shares and other assets selected by the fund manager. Investing in funds can spread your risk compared to investing in shares in individual companies. Index-linked funds, also known as tracker funds, aim to generate returns that are similar to the performance of a stock market index. These might include the UK’s FTSE100, or the S&P 500 in the US. It’s often seen as (comparatively) one of the safest investment strategies. While, by definition, you’re unlikely to outperform the market, it can deliver better returns in the long term than some more active approaches.

What is momentum investing?

If you opt for a momentum investment strategy, you’re probably not someone who’s looking to buck any trends in your choice of investments. With this strategy, you’ll buy stocks and shares that have already gone up in value on the assumption they’ll carry on growing for at least a few months. You’ll also ditch any that are falling on the basis they’ll continue to do so. You need to be on the ball with this strategy. While trends can indeed continue for surprisingly long periods, they can also flip surprisingly quickly. You need to be ready to act when this happens to avoid facing the full force of this change in fortunes.

What is growth investing?

If you’re a growth investor, you’ll be on the look out for companies with high potential. Rather than opting for shares in companies that are already very successful, growth investors look for companies that are rapidly expanding, showing strong profit growth, and often reinvesting profits back into the business. While this may sound like a no-brainer strategy, and can be a good approach, of course it’s not without risk. Nobody has a crystal ball, and you only have to look back to the dot-com boom (and bust) of the 1990s for examples of companies that were showing stellar growth just before they collapsed.

What is value investing?

If you love nothing better than rummaging through the metaphorical investment rails seeking out an overlooked bargain, then value investing could be your bag. Value investors are constantly on the hunt for gems that are trading at a discount to their actual value. And, if they get it right – and hold their nerve – they stand to gain if other investors later realise what they’ve missed and jump on the bandwagon, driving up the price. The potential rewards are therefore huge, but so are the risks. Sometimes, shares start out at a low price and stay that way (or even go down). So you may never get a chance to benefit from any rise.

What is contrarian investing?

Arguably, value investing is a form of contrarian investing, as you’re going against the crowd to seek out companies that many people wouldn’t touch with a bargepole. Other tactics can include buying when most investors are selling, and vice versa. The theory, unlike that of momentum investors, is that there is no point in keeping shares in an already successful company because there is limited opportunity for growth. Whereas if you buy when most people predict a downturn and ditch their investments, that’s when the growth opportunity is highest. Like value investing, there’s the potential for high reward, but this comes with high risk if the masses turn out to be right.

What is income investing?

Usually seen as a relatively low-risk strategy, income investors prioritise more immediate earnings over long-term capital growth. They prioritise investing in mature firms in stable industries that pay out dividends. It might be more likely to be an approach favoured by those with sizeable investments, who rely on their investments for income rather than having other sources (such as employment).

What is pound-cost averaging?

This is an approach, rather than investment strategy per se. Instead of investing a large amount in one go, this is where you make regular (often smaller) investments in the market over time. Pound-cost averaging spreads the risk of poor market timing. It can be gut wrenching if, for example, you throw a big lump sum into the market just before it takes a downturn. The approach can be appropriate for those in a position to drip-feed a portion of a regular income into investments. Many investment platforms let you set up an automatic regular payment to make doing so easy. However, if you have a lump sum to invest at the outset, it’s not necessarily going to benefit you to hold back most of your lump sum just so you can take this approach. Typically, the longer you have money invested for, the higher the likely returns.

Expert comment: What is the best investment strategy for a beginner?

Danny Butler

Publisher

If you're new to investing, before getting into investment strategies you need to decide if investing is right for you in the first place. Start by asking yourself a few questions, including:

• What's your current financial situation? Think about your cost of living, including any debts you need to repay, and how you'd cope financially if you lost a regular source of income.
• With this in mind, how much can you afford to invest? This might be immediately or as a regular payment.
• How long can you afford to tie your money up for?

While investing has the potential for higher returns than cash in the long term, it might not yet be right for you if you have high-interest debts or other obligations, as you might be better off paying these off first. And it's always a good idea to keep a few months' worth of your regular income in an easy access cash savings account, just in case your income dries up (if you lose your job, for example). So if you don't already have this, it should be your priority over investing.

Finally, investing is for the long-term. Experts generally recommend that if you can't afford to leave your money invested for at least 5 years, you probably shouldn't invest it. 5 years should give you enough time to ride out any short-term downturns in the market. So if you'll need your money to buy a property in 2 years' time, you might be better off seeking out the highest-interest savings account you can find.

In summary, sometimes the best investment strategy is not to invest at all. But if you can afford to, you then need to move on to picking the investment strategy that's right for you as an individual.

How can I choose an investment strategy that’s right for me?

First things first, there’s no such thing as the “best” investment strategy for everyone, and no strategy is risk-free. The right one for you depends on your goals and circumstances. So, if you have money that you can afford to invest, your first step should be to lay these out clearly. Think about:

• What you want to use your investments for. Are you saving for retirement, to pay for your children’s education, or to generate an income, for example?
• What your attitude to risk is. This isn’t always easy to assess by yourself, but if you’d lose sleep over steep losses in the short term, you might want to consider a lower-risk strategy. Regardless of how you’d feel, other factors such as your level of income or assets and your age are also likely to impact your appetite for risk. Generally, the younger you are, the more risk you can afford to take as your investments will have longer to recover from any short-term shocks.
• Whether you want (or are able) to invest a lump sum, or if you want to make regular payments instead or as well.
• How much time (or inclination) you have to proactively monitor and manage your investments. If you’re time-poor, you may want to opt for a strategy that focuses on passive investing. Alternatively, you can pay a financial adviser to help.

Even if you’re investing in funds run by fund managers, rather than buying and selling stocks and shares yourself, it can be useful to know about the different strategies they might favour. That way, you can select the funds in your portfolio according to your own strategic preferences.

How can I get started investing?

There are a few ways to get started with investing. The cheapest way to buy shares and funds is usually through a DIY online trading platform. These are sometimes called “investment supermarkets” because, like buying food in a regular supermarket, they offer a choice of stocks, shares or funds to invest in. You’ll need to pay a fee to use the platform, plus a range of charges for the funds or shares themselves.

You can also pay a financial adviser for investment help. They can either offer you one-off advice on how to get started, including the best strategy to adopt for your needs, or work with you and help you manage your investments in the long term.

There’s also a middle ground, in the form of robo-advisor investment platforms. These use clever, automated algorithms that ask you a series of questions. They use your answers to make recommendations and automatically invest your money.

If you’re new to investing, a stocks and shares ISA can be a good way to get started, as you’ll benefit from tax-free returns on up to £20,000 of savings or investments contributions per year. The £20,000 limit applies across both cash and stocks and shares ISAs, so if you’ve already put half of your allowance into a cash ISA, you can invest the other half into a stocks and shares ISA in the same year.

What are the different ways I can invest in the stock market?

There are 2 main ways to invest in the stock market.

• Invest directly in stocks and shares in individual companies that are listed on the stock market. Buying a share effectively means buying a small unit representing the value of a company. If, for example, a company is worth £1 million, and there are a million shares, each share is worth £1. Share values can fall and (as you’ll hope, if you have shares in a company) rise over time.
• Investing in funds. Funds are made up of stocks and shares in lots of different companies. Your money is pooled with lots of other investors by a fund manager, allowing you to invest in many more companies than you would probably be able to as an individual. You can get funds that specialise in lots of different areas. These include anything from tracker funds, which aim to replicate the performance of a particular market (such as the FTSE 100), to funds that specialise in ethical investments, or in technology firms.

How much money do I need to start investing?

You might assume that you need to be pretty flush in order to start investing. But it’s not the case. It might have been true in the past that investing was largely the territory of the wealthy who could afford to pay for financial advice. But, these days, the availability and relatively low charges of DIY investment platforms have opened up investing to far more people.

In fact, you can often get started from as little as £500 as a lump sum, or a £50 regular monthly payment. You can sometimes start with even less. Some platforms may have higher minimum investments, so this might affect your choice. And if you’re investing in shares (rather than funds), you might want to start with a bit more in order to spread your risk and mitigate the impact of trading fees.

In fact, regardless of what type of investment you choose, make sure you scrutinise and compare fees before choosing an investment platform. Charges can vary dramatically, and some charge percentage fees while others charge fixed fees. Low, percentage-based fees tend to be best for those with only small amounts to invest. Flat fees can work out better for those with high-value portfolios.

What is an investment portfolio?

An investment portfolio is the “basket” of investment assets that you hold. It can include stocks, shares and funds, as well as other forms of investment such as property, or government or corporate bonds (loans that are made to government or companies in exchange for interest).

What should my portfolio look like?

As with investment strategies, there’s no right or wrong answer to this as it depends on your personal circumstances and attitude to risk. But the aim is to build a balanced portfolio that helps you meet your goals over a certain timeframe. It’s generally recommended that your portfolio includes a mix of different asset types, with higher or lower levels of risk. You can weight the proportion of assets according to your appetite for risk and how long you plan to hold the investments.

If you only have a small amount to invest, your ability to diversify your portfolio by buying lots of different assets will be limited. If this is the case, you might be best to opt for 1 or 2 funds that are themselves diversified across multiple companies and asset classes.

Can I get professional help with investing?

Yes. If you’re not sure where to start, or even if you’re already investing but decide you need some help to make your investments work harder, paying a financial adviser could be a worthwhile investment. Not only might they be able to recommend options to meet your needs that you wouldn’t have considered, but if they give you poor advice you will be able to complain and may be entitled to compensation. Some financial advisers won’t take on clients with less than a certain amount to invest though. Even if they will they may charge more than you’re willing to pay.

If you’re not sure how to find a financial adviser, online directories such as Unbiased and VouchedFor can be good places to start.

What guidance and tools can I use to learn how to invest?

Many investment platforms offer online advice guides and tools to help you understand the ins and outs of investing and the types of account it’s worth considering. They won’t be able to offer personal advice tailored to your specific circumstances.

If you would welcome more targeted guidance, but baulk at the cost of financial advice, it’s worth considering a robo-advisor platform. These make fund recommendations and invest your money based on your answers to a series of questions about your goals and attitude to risk.

How do I research what to invest in?

If you’re using a financial adviser or a robo-advisor platform, you shouldn’t need to do much research (beyond choosing the adviser or platform in the first place) as it will make recommendations for you.

If you’ve opted for the DIY approach, things to consider depend on whether you’re going for funds or investing directly in stocks and shares. Investment platforms will usually publish fact sheets about the investments you can buy through their websites, which are a good starting point.

If you’re choosing funds, look at things like:

• Whether they’re passively or actively managed.
• The range of assets that the fund invests in, including whether they’re lower- or higher-risk.
• Previous returns (though this is no guarantee of future returns).
• Fund charges (ongoing, and to buy and sell).

If you’re investing directly in stocks and shares, you’ll need to do a bit more homework to pick the right ones in accordance with your investment strategy. Check:

• The company’s performance records. If a company is listed in the UK, official reports will be available on the London Stock Exchange’s Regulatory News Service (RNS).
• Company news and commentary on specialist websites, such as Citywire or Morningstar.
• News and information on investment platform websites.

Finder survey: Are your investment choices mainly driven by financial reasons or your passion for the company?

What is a safe investment strategy?

There’s no such thing as a completely “safe” investment strategy. Investing by definition carries risk, and the value of your investments can go down as well as up. But there are tactics you can use to reduce the risk of losses that will be detrimental to your goals.

What can I do to reduce the risk of investment losses?

• Remember that investing is for the long-term. Ideally, you shouldn’t invest money you can’t afford to keep invested for at least 5 years. This should be long enough to manage the impact of any short-term volatility.
• Pick the right investments for your goals. While no investment is risk-free, some are riskier than others. If you’re going to need the money in your investments for a fast-approaching retirement, you may want to move money out of higher-risk investments and into lower-risk ones, such as tracker funds.
• Diversify your portfolio as much as possible, including considering global investments. That way, if one part of your portfolio is struggling, it will hopefully be offset by parts that are doing well.
• Consider a pound-cost averaging approach. Drip-feeding money in will smooth returns over time and help manage short-term risks.

Bottom line

There’s no silver bullet that guarantees investment success, but planning, research and sticking to your strategy will all help ease the way. Don’t invest more than you can afford to lose, invest according to your goals and appetite for risk, and don’t panic if your investments take a temporary dip. Short-term volatility is inevitable, and markets usually bounce back in the longer term.

Frequently asked questions

• How can I grow my money fast?

  If you have some money to save and want it to grow, then investing it offers the potential for higher returns than putting it in a cash savings account – particularly in the current low-interest environment. But, sorry to be the bearer of bad news, growing it “fast” is another matter. While some investments offer the potential for high returns over a short period, they’re usually also the investments that come with the highest risk of losing some (or most) of your capital. You should only take this kind of risk with money you can afford to lose. Otherwise, sticking with investments for the long-term (at least 5 years) offers the best chance of a good return.

• Is £1,000 enough to start investing?

  Yes. In fact, some investment platforms and robo-advisors let you start with even less than this. In some cases you can even start from as little as a pound. Obviously £1 worth of investment isn’t likely to get you far towards your investment goals. But, if you can commit to drip-feeding in regular small amounts, the value of your investments will add up over time.

• Does my age affect the investments I should choose?

  Potentially. It’s not the only thing to take into account, but generally younger people can afford to opt for higher-risk investments than older people. That’s because there’s usually a longer period for the investments to ride out any short-term volatility. If you might need your investments to fund your retirement, for example, you don’t want your portfolio taking a nose dive just before you retire and need the money. For this reason, pensions are often moved into increasingly low-risk assets as the holders approach retirement.

• At what age should you stop investing?

  You don’t ever have to stop investing. While your choice of precisely what to invest in may change as you get older (and you may wish to avoid high-risk investments), that doesn’t mean you need to stop investing entirely. In fact, many people choose to leave their defined contribution pension pots invested after they retire, only drawing out cash as they need it.

• Should I invest all my spare cash?

  We wouldn’t recommend you invest all of it, no. Experts generally recommend keeping a few months’ worth of income in an accessible cash savings account, to cover regular outgoings and essentials if you suddenly lose your job or other sources of income. Even after you’ve done that, you should consider paying off any expensive debt before you start investing. You’ll also want to consider future needs for that cash. If you’re planning to go travelling, buy a property or get married in the next couple of years, for example, you won’t want money you need for that to be tied up in investments. Beyond that, the choice is yours, depending on your goals and personal circumstances.