Methodology

Investing Basics

Module 3

What is a portfolio?

Formulating a Strategy

An investment strategy is a style of investing that helps an individual to meet their investment objectives. When we discussed objectives, we briefly mentioned the impact of age and time. However, when it comes to the actual strategy that an individual uses, there are more factors that can determine their choice. These are age, goals, lifestyle, current financial situation, available savings, personal situation (i.e. family situation, career level) as well as expected returns from investments. 

 

Of course, this list could include many more factors – risk tolerance being a significant personality trait that was not considered. As with objectives, selecting an investment strategy that fits your tolerance to risk is important. Nonetheless, the outlined factors influence the strategy that an investor may choose to follow.

Using an aggressive investment strategy

A more extreme approach to investment strategy would be an aggressive approach. This involves investing in assets that offer the highest levels of risk, with the aim of growing a person’s savings as quickly as possible.

 

This approach is suitable for people that do not need the money that they are investing, as there is a greater risk that they will lose it.  So, this approach may not be suitable if someone is unemployed, has less than $100 in their bank account or is struggling to support two children. In these cases, an aggressive strategy would probably not be suitable as the money is needed elsewhere.

 

An aggressive investment strategy will involve investing in very risky assets (such as stocks). It could also include investing without diversifying investments, which would expose an investor to an extremely high amount of risk. It may not be commonly known, but investing in cryptocurrencies, like Bitcoin, is a highly aggressive investment strategy. This is because cryptocurrencies are not regulated and change in price dramatically, making them one of the riskiest investment options.

 

As high-risk assets are used, aggressive investors should expect to receive a higher than average return (more than 10% per year). However, with the high level of risk involved, aggressive investors should be fully aware that they could end up with nothing.

Using a conservative investment strategy

The opposite of an aggressive approach to investing, would be a conservative approach. A conservative approach is one that involves very low risk investments that provide stable returns. This approach is mostly suitable for people that rely on the money that they invest with and do not want to risk losing any of it. It perhaps would be a suitable choice for someone that is in a more unstable situation or someone that has a very low tolerance towards risk.

 

A very conservative investor would diversify their investments a lot while investing in low-risk assets (i.e. government bonds or cash investments). As low-risk assets are involved, conservative investors should expect to receive a low return, somewhere in the region of 0.5% to 3% per year. This would clearly not suit an individual that wants to grow their money significantly over time.

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