Four investment strategies explained
In this article four general investment strategies are explained. Your personal risk tolerance and where you stand in the investment life cycle will determine which strategy is right for you.
Investing for protection:
When an investor feels uncomfortable with the risk profile of existing capital he should use a protection strategy. The main purpose of this investment strategy is to maintain the original capital and protect their wealth. To maintain long-term purchasing power the investor requires growth in line with inflation. An investor can maintain a protective investment strategy for as long as needed, but usually will only use this strategy for a short period of time.
Income investment strategy:
Many investors use this strategy after they have accumulated enough capital and don’t feel comfortable with high volatility and risks. Their main target is to generate an acceptable level of income from their existing capital. 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:
The investor should only implement this higher volatility strategy when he 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.
Speculative investment strategy:
The investor should only consider this strategy if he 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 difficult to independently verify their market value. Speculative investing is only recommended to those who really do not need the invested money for the long term. The investor needs to accept large losses on 90% of their investments on a regular basis. However, the thrill of a highly lucrative investment compensates for this.
Now that you read this short article about the most common investment strategies, we offer a personal consultation with one of our consultants online. Please contact us to set up a call.