Four investment strategies explained
Investing for protection
This strategy is common for people that are not comfortable with the current situation of where their money is kept. For instance the banking system is not stable or the currency in which your capital is held devalues. The main purpose of this investment is to maintain the original value and protect the wealth. Slight growth, in line with inflation, to maintain purchasing power is generally required for long term investments. Although usually a short term strategy a protective investment strategy can be maintained for as long as needed.
Investing for income
This is a strategy that many investors use who have already accumulated enough capital and do not feel comfortable with high volatility and risks. Their main target is to generate an acceptable level of income. In the ideal situation the income generated will be sufficient to maintain their current lifestyle and compensate for inflation in the future years to come. This investment strategy is suitable for both shorter term investment horizons of 2-3 years as well as long term investment horizons.
Investing for capital growth
This strategy involves higher volatility and should only be implemented in case the investor has plenty of time. By plenty of time we mean more than five years. A shorter timescale could see fluctuations in the market place result in negative results. In general this strategy will outperform the protection and income strategy over a period of 5 years or more. The main purpose for the capital growth strategy is to aid the growth in capital to the required level and then switch to a less volatile strategy.
This strategy should only be considered if the investor is ready to lose his investment. There is a very high chance that the investment will fail, but a successful investment will be extremely lucrative. Venture capital investors, business angels and similar investors will have a speculative strategy. The speculative investor will often need to invest in as many as ten projects before achieving a successful investment. Speculative investments, even successful ones can be very illiquid due to the fact that it is almost impossible to independently verify their market value. Speculative investing therefore is only recommended to those who really do not need the invested money for a long term, are ready to lose 90% of their investments on a regular basis, but search the thrill of a highly lucrative successful investment.