Investment strategy

In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. Individuals have different profit objectives, and their individual skills make different tactics and strategies appropriate. Some choices involve a tradeoff between risk and return. Most investors fall somewhere in between, accepting some risk for the expectation of higher returns.

No strategy: Investors who don't have a strategy have been called Sheep. Arbitrary choices modeled on throwing darts at a page (referencing earlier decades when stock prices were listed daily in the newspapers) have been called Blind Folded Monkeys Throwing Darts. This famous test had debatable outcomes.

Active vs Passive: Passive strategies like buy and hold and passive indexing are often used to minimize transaction costs. Investors don't believe it is possible to time the market. Active strategies such as momentum trading are an attempt to outperform benchmark indexes. Investors believe they have the better than average skills.

Momentum Trading: One strategy is to select investments based on their recent past performance. There is evidence both for and against this strategy.

Buy and Hold: This strategy involves buying company shares or funds and hold them for a long period. It is a long term investment strategy, based on the concept that in the long run equity markets give a good rate of return despite periods of volatility or decline. This viewpoint also holds that market timing, that one can enter the market on the lows and sell on the highs, does not work or does not work for small investors, so it is better to simply buy and hold.

Indexing: Indexing is where an investor buys a small proportion of all the shares in a market index such as the S&P 500, or more likely, an index mutual fund or an exchange-traded fund (ETF). This can be either a passive strategy if held for long periods, or an active strategy if the index is used to enter and exit the market quickly.

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