An investment strategy is a plan for allocating assets in an investment portfolio. Investment strategies are driven by individual investment philosophies and approaches that attempt to balance an investment’s rates of risk and return based on such factors as the investor’s financial goals, risk tolerance and time horizon. Because it plays a significant role in determining profits and losses, investment strategy is an important consideration.
Given the diversity of the investment opportunities, account managers and investors that influence their development, there are a wide variety of investment strategies from which to choose. For instance, some strategies involve greater risk to increase growth and maximize profits, while others take more conservative approaches in an effort to curtail loss. In addition, many investors employ a top-down approach to select investments based on broad market themes; others focus on investment-specific criteria in bottom-up strategies. Still other investors aim to create balanced portfolios that utilize diverse investment strategies.
While the differences between individual investment strategies are nearly unlimited, most approaches fall into several general categories. Investment strategies may be guided by the length of investment, as in the case of buy and hold strategies that depend on long-term market growth or day trading techniques that capitalize on daily market fluctuations. Other investment strategies involve allocating assets based on market trends: some investment managers employ a sector-based style that focuses on the ups and downs of a particular industry, for example, and others attempt to profit from seemingly under-priced investments in value-style trading.
Investors should consider their financial goals, risk tolerance and personal circumstances to select an investment strategy that aligns with their objectives. Both short- and long-term earning requirements, which may be determined by factors like future income potential or immediate savings goals, generally define an investor’s time horizon, or the length of investment. Investors must also understand how their risk tolerance—their level of comfort with potential investment volatility—corresponds with an investment’s risk profile. Many investment websites and account managers offer risk tolerance and investment style questionnaire tools to help investors identify the most appropriate investment strategies.