Can you check my investment portfolio 1
A comparison of investment strategies: three steps to sustainable wealth accumulation
Valeria Nickel, April 30, 2021
Get rich with your own investments like Warren Buffet & Co. - who doesn't want that? Any hardworking investor is secretly hoping to find a gold mine among their investments.
However, 99% of the time, the success of an investor is not based on a lucky coincidence. Rather, it is correct investment strategy the key to growing wealth.
An investment strategy is the plan an investor uses to make investment decisions. It describes a specific, long-term approach to asset allocation, with trade with stocks, ETFs, bonds, options, certificates or with Risk management.
Two methods of investment strategy
The active investment strategy
Active wealth management is operated by investors who use an information advantage over other market participants or who, in their opinion, use incorrect valuations of securities in order to invest money profitably in the financial markets.
“Stock picking” is typical of an active investment strategy. The investor picks out certain stocks or bonds that promise the most attractive investment opportunities based on the information available to him.
Another feature is the tuned Timing: The investor actively chooses the most favorable time to enter a market (at the lowest price) or to exit (at the highest price).
Last is that too Goal of excess return a typical peculiarity of the active investment strategy. It's about the ambition to be better than the market. Active fund managers choose a comparative index, a so-called benchmark, that they want to beat.
The passive method
Passive wealth management on the other hand, he refrains from picking out supposedly attractive securities, predicting prices or only getting in and out at specific times.
With a passive investment strategy, the investor does not want to exceed the return of a benchmark index, but rather to replicate it and achieve a comparable return with a comparable risk - practically that Reflection of a market or create a market segment. Forecasts, reports and opinions from analysts then no longer play a role.
An example of a passive investment strategy is a DAX ETF. Such a passively managed index fund tracks the 30 largest stock corporations in Germany (measured by their market capitalization).
1 | Build a portfolio
Your investment strategy starts with building your portfolio. A portfolio is made up of many different asset classes:
There are these asset classes
- Deposits (overnight and fixed-term deposits, savings book, savings plan, savings account)
- Securities (stocks, bonds, funds, certificates)
- Real estate (home ownership, real estate crowdinvesting, real estate funds)
- Raw materials (agricultural raw materials, energy resources, precious metals such as gold)
- Alternative investments (private equity funds, hedge funds)
Diversification within the portfolio
Basically, your portfolio can contain anything that you expect to increase in value in the short or long term. Important however, it means that you diversify.
In addition to opportunities for (price) gains, every security or investment object also harbors Risk of loss. On the one hand, there are stock or property-specific risks inherent in the investment itself. For another, there is Market risksthat result from the development of the individual (securities, real estate or commodities) markets. In addition, there is an investment in foreign currencies Currency risk. Whether the category, industry or company - as an investor, you should think through various scenarios in order to be prepared for breakdowns in each of the fields.
Special attention is required: There are more correlations on the stock market than you might think at first glance. For example, those who only invest in stocks are not safe from a stock crash. Therefore, investors should always keep their portfolio Diversify across different asset classes.
If the investment volume is low, this can be done with real estate crowdinvesting, for example: At BERGFÜRST you will find current investment opportunities with a minimum investment of just € 10. In contrast to crowdfunding, the focus here is on the return on investment.
Long-term planning pays off
In addition, when building the portfolio you have to decide which one Investor type You are. This includes which individual risk tolerance you have, which investment goals you are pursuing, which return expectations you have and which investment horizon you have available.
An investment strategy is based not only on objective criteria such as fundamental and technical securities analysis and general development prospects of a market, but also on the financial situation and personal preferences of the investor.
One per se perfect investment strategy does not exist - your personal situation always plays an important role!
The magic triangle
There is one for a personal evaluation of your capital investment "Magic triangle": Return on investment - security - availability. The investor has to decide how he wants to weight which point.
This depends, for example, on the economic and market theories that he basically advocates. On the other hand, your age also plays a certain role: Those who are just starting to build up wealth can, for example, take higher risks and afford less capital availability. For someone who is about to retire, on the other hand, the safety of the investment product could be the decisive point.
Don't forget the risks
As soon as the portfolio structure is in place, you should take care of your Risk management To take care of. Many private investors think very carefully about which asset classes they want to invest money in and how they weight them, but then often ignore the risks of investing and do not take any precautions in the event of an emergency. In the stock market you should at least Stop loss rates to protect yourself against price losses or to secure profits.
2 | Comparison of the individual investment strategies
You can invest actively or passively, in individual stocks or in funds, or include a property or not. There are innumerable investment strategies. Below is a brief overview.
Investors in high-growth companies invest and hope for a large increase in sales, pursue the so-called growth strategy. This can be found above all in high-tech markets such as the software industry and in information and biotechnology.
The shares of these mostly very young companies are at the very beginning of their development. This is exactly why they often instruct high price / earnings ratio (KGV). A high P / E ratio means that the company's share price (market valuation) is high compared to its earnings.
But not only on the stock exchange, but also with crowd investing in start-ups, you can pursue this investment strategy and achieve high profits.
Value investors are specifically looking for undervalued companieswhose potential for price increases they rate as high based on a fundamental analysis.
The Fundamental analysis In contrast to chart analysis, it is not based on a consideration of past chart patterns, but on business data and the economic environment of a company - the so-called Fundamentals.
Prominent representatives of value investing are Warren Buffet and Joel Greenblatt. Value stocks are for example Daimler or Coca-Cola.
This classic strategy relies on the long-term fertility of investments and dispenses with market timing. Because it assumes that it is hardly possible to find the most favorable entry and exit times on the financial market, since the largest price movements occur within very short periods of time.
In addition, speculation in the markets could lead to significant exaggerations and understatements over short periods of time. As a result, prices can temporarily deviate significantly from their long-term averages. In the long run, however, the Company fundamentals that determine economic growth, corporate profits and thus stock market prices.
A well-known proponent of this strategy was André Kostolany. His most famous piece of advice was probably to go to the pharmacy, get some sleeping pills, take some, buy some international standards, and sleep for a few years.
Another investment strategy is to buy certain stocks when the majority of market participants are pessimistic; and sell again as soon as the euphoria has reached its peak. In reality, however, this countercyclical or contrarian strategy can hardly be maintained.
On the one hand it is hardly possible to predict course turns. This tries the Sentiment analysis: She researches investor psychology in specific market situations. However, it is questionable whether the mood of investors can help to make assumptions about future price developments.
On the other hand, it demands an almost superhuman psyche from the investor to constantly swim against the current. He also has a hard time dealing with stocks that go up or down over the long term.
Procyclical strategy or momentum strategy
In the opposite approach to the contrarian strategy, the investor is primarily buying securities that he expects to see accelerated growth in the near future.
The approach of the dividend strategy is to select companies with a high dividend yield for your portfolio, which guarantees regular distributions. The dividends are not to be underestimated, because not only price increases increase the yield, but also good dividends.
Blue chips, the shares of large listed companies with the highest turnover, are subject to lower price fluctuations than small caps in the long term. They are characterized by a high trading volume and a higher level of commitment from institutional investors. If investors specifically select these companies with stable sales and earnings, they take less risk when investing.
Those who want to invest passively can choose investment products that simply track an index or multiple indices. These are passive funds - also known as ETFs. ETF is the abbreviation for Exchange Traded Funds. The return corresponds to the respective index that they track. It varies depending on the region and the focus of the index.
3 | Check strategy for no-gos
Chasing after performance: Investors tend to choose investment products that have performed well recently. They hope to benefit from the upward trend. Most of the time, however, the greatest development is already over by this point.
Having too much self-confidence: Instincts are good - control is better. It is an advantage to have a neutral third party review your own investment ideas. This can be a fee advisor, a trustworthy friend or an investment club.
Step into cost traps: When striving for high returns, the investment costs often take a back seat. Actively managed products often promise higher interest rates than passively managed products, but they also require a lot more effort and permanent “treatment”. Therefore, they cause significantly higher costs. With passive investment strategies, the costs can be kept significantly lower, as no active manager has to use his intelligence. This in turn benefits the return.
Image Copyright: tomertu / Shutterstock.com
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