What’s the best strategy for small investors?
There’s no single investment strategy that’s right for every investor. And the chances are great that during one’s investment lifetime, an investor will utilize one or more investment strategy in an attempt to achieve their goals or to participate or explore other ways to make money in the markets.
Traditional Investment Strategies
Traditional “investment strategies” refer to the types of stocks or mutual funds investors purchase to achieve their goals and are as follows:
Growth investing is a strategy where the investor targets companies (via stocks or mutual funds) that have high growth earnings. These companies may have above-average, price-to-book ratios and sales and earnings growth, but below-average dividend yields. Growth investing is probably more appropriate for investors with longer time horizons who should be willing to accept increased risk exposure in expectation of greater long-term returns on their investment.
Income investing is a strategy where the investor targets companies or bonds that generate current income (as oppose to growth of capital) in the form of high yielding dividends. Income investments tend to be conservative and are probably more appropriate for investors who may be approaching retirement or are currently retired. They can also be appropriate for investors who are looking to temporarily protect their capital or gains they’ve made in the market.
Value investing is a strategy where the investor targets companies that are undervalued or growth opportunities that are below average for the market. Value stock companies may pay shareholders dividend income and may trade at lower prices in relation to their earnings or book value.
Buy-and-Hold vs. Market-Timing
Investment strategy as it relates to The Pinnacle Peak Report refers to the philosophy or the approach investors take when determining and executing their strategy for generating long-term profits in the stock market.
For most small investors, long-term return on investment should be the only factor that matters. And if you have a long-term horizon as an investor, there are really only two investment strategies (philosophies or approaches) you take; buy-and-hold and market timing. I left out trading or day-trading as that is not the focus of this newsletter nor is it a prudent strategy for traditional, small investors.
A buy-and-hold strategy is when an investor ignores short-term market fluctuations and “holds” his or her investments for long periods of time. An investor who implements a buy-and-hold strategy actively selects stocks or mutual funds, but once in a position, is not concerned with short-term price movements and technical indicators. A buy-and-hold strategy can be considered a passive strategy because the investor makes very little if any changes to his or her investments and is not concerned with short term profits but rather long-term appreciation.
I would also include “chasing performance” as a secondary, sub-strategy under the buy-and-hold strategy. Chasing performance refers to purchasing mutual funds based on the performance of the previous year or past three or five years (see Investing page for more information on chasing performance).
A market-timing strategy is when an investor attempts to predict the future direction of the market using historical data, technical indicators, economic data and experience. Market timing can be considered an active strategy because the investor continuously monitors his or her investments and places buy and sell orders to take advantage of profitable conditions or to protect recent gains. Market timing can also refer the practice of switching back and forth among mutual fund asset class in an attempt to profit from changes in their market outlook.
Some consider the buy-and-hold strategy to be a long-term approach to investing and market-timing a short-term approach. While market timing does involve placing buy and sell orders, simply buying into or getting out of stocks or mutual fund doesn’t mean an investor can’t have a long-term approach or strategy.
In addition, timing the market doesn’t mean that an investor will have to take on any increased risk exposure. In fact market timers many times decrease their risk exposure by being out of the stock market (or equities) during periods when the markets are significantly overvalued or overbought and the risk of downside losses is greater than the upside potential.
The Pinnacle Peak Report will show you how market-timing can be an effective and efficient strategy for investors who are looking to increase their return on investment and decrease their risk exposure.