Exploring Investment Strategies: Indexing, Value Investing, Buy and Hold, and Beyond

When it comes to investing in the stock market in the medium and long term, there are several types of investment strategies: growth, dividends, value investing, indexing, buy and hold, and many more. Most of these strategies require fundamental analysis to determine whether the shares, of one company or another, are suitable for the investment strategy we follow.

This does not mean that the shares of a company can only fit into one type of stock market investment strategy. For example, a company suitable for the dividend-based strategy can also fit into a buy-and-hold portfolio.

investment strategies

Indexing

Indexing is the investment strategy where you invest in funds that track a market index, such as the FTSE100, S&P 500, or the Dow Jones Industrial Average. The goal is to replicate the performance of the index, providing diversification and often lower costs compared to actively managed funds. This strategy is popular among retail investors due to its simplicity and potential for steady returns over the long term.

Value investing

Value investing is an investment strategy that focuses on buying stocks of companies when they are priced lower than their true worth (intrinsic value). The goal is to take advantage of the difference between the stock price and the actual value of the company. In other words, value investors aim to buy stocks at a significant discount to their real value, ensuring a safety margin.

Once these undervalued stocks are purchased, they are typically held until their price either reaches its true value or goes beyond it by a certain percentage, such as 10%. To put it simply, value investing involves buying low and selling high.

To determine the true value of a company's stock, investors perform a fundamental analysis, which involves examining the company's financial statements. This analysis helps investors identify whether a stock is undervalued or not. Only after conducting this analysis can one confidently say they are buying a stock at a discount.

Contrarian investment

Contrarian investing is a strategy that entails investing in companies facing significant challenges due to economic conditions, market cycles, or other factors. This approach also includes investing in companies that are currently unpopular but have solid reasons to believe they will experience a substantial increase in value. In essence, it involves putting money into companies that are currently under pressure in the short term.

Growth investing

Growth investing focuses on identifying companies expected to experience significant growth in the upcoming years. Often, these companies are small and relatively new to the market.

Due to the high expectations of future growth, these companies typically trade at elevated prices. However, it's important to note that these growth expectations may not always materialise, and investments in growth companies may not always perform well. This strategy tends to carry a higher level of risk compared to other approaches, although successful investments in growth companies can yield substantial returns.

In addition to conducting fundamental analysis, investing in growth companies also requires a qualitative assessment of the business to determine if it genuinely has the potential for substantial future growth.

👉 Find out how to categorise the different type of stocks according to Peter Lynch

GARP strategy: growth at a reasonable price

The GARP strategy is halfway between value investing and growth investing. Specifically, the GARP strategy is based on selecting companies with moderate growth expectations that are still reasonably priced (as many growth companies have very high prices) nor are they quoted at an excessive discount, which eliminates companies with little growth potential.

garp investment strategy

Buy & hold

The buy-and-hold strategy consists of buying assets and holding them for a very long time. This implies that the chosen companies must have competitive advantages and that they will maintain them in the long term.

In this type of investment, asset prices are less important since capital appreciation is the purpose. The only reason for selling in this strategy is the deterioration of the fundamentals of the company, which would imply a loss of competitive advantages and a decrease in the company's growth in the long term.

In short, the buy-and-hold strategy is based on investing in companies with long-term potential and holding these assets for a long time, usually more than 10 years or even indefinitely.

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Dividend investing

Dividend investing is based on investing in companies that pay regular dividends. The main purpose of this strategy is to generate passive income in the form of dividends, which can be used for personal purposes or can be reinvested, taking advantage of the benefits of dividend growth over time.

dividend growth

The best companies to carry out this strategy are companies with stable profits and, if possible, growing year after year. The requirement to invest in companies is the dividend yield and its sustainability. If you want to know more about dividends, check out our dividends guide.

Cyclical investing

Cyclical companies are those whose performance and stock prices are strongly influenced by economic fluctuations. These companies do well when the economy is growing and tend to underperform during economic downturns.

Cyclical investing involves timing the market to some extent, aiming to buy these stocks when the economy is about to enter a growth phase and selling them when an economic downturn seems imminent. This strategy can be more risky and requires a good understanding of economic cycles and market trends.

Momentum investment strategy

The Momentum investment strategy is based on the principle of capitalising on existing market trends. In this strategy, investors buy stocks or other assets that have shown an upward price trend and sell those that are showing a downward trend.

This strategy has proven to be profitable and has been widely studied by Narasimhan Jegadeesh and Sheridan Titman.

Investors look for assets that have been consistently performing well over a recent period, typically from a few months to a year. Once these assets are identified, investors buy them with the expectation that the upward trend will continue. Similarly, assets that are on a downward trend are sold off to avoid potential losses.

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Summary Investment strategies

IndexingInvest in indices through ETFs or funds.
Value investingInvest in companies with an attractive price, take advantage of the difference between price and intrinsic value.
Contrarian investingInvest in companies with poor performance and wait for their valuations to improve.
GrowthInvest in companies that are expected to grow significantly in the coming years.
GARPInvestment strategy halfway between value and growth.
Dividend investingInvest only in companies that distribute dividends regularly.
Cyclical investingBuy stocks when the economy is about to enter a growth phase and selling them when an economic downturn seems imminent.
Buy & holdBuy and hold the stocks for a very long term.
Momentum investingBuy stocks or other assets that have shown an upward price trend and sell those that are showing a downward trend

FAQs

What is a diversified investment strategy?

Diversification is a strategy where you spread your investments across various asset classes, like stocks, bonds, and real estate, to reduce risk. The idea is that if one asset class performs poorly, the others may compensate.

What is a dollar-cost averaging investment strategy?

Dollar-cost averaging involves regularly investing a fixed amount of money regardless of market conditions. This strategy can lower the average cost of investments over time and reduce the impact of market volatility.

What is an aggressive investment strategy?

An aggressive strategy aims for higher returns but comes with higher risk. It often involves investing a larger portion in stocks, especially in high-growth or speculative shares, and less in bonds or other low-risk securities.

What is a conservative investment strategy?

A conservative strategy prioritises preservation of capital and minimal risk. It often involves investing in low-risk securities like government bonds, high-grade corporate bonds, and stable value funds.

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