Key of Balance
To use another familiar metaphor, investing styles and tactics are like the clothes that fit you best. You don't need anything expensive or tailor-made; you need something comfortable that will last a long time, especially if your investment objective is long-term (10 years or more).
The best investing strategies are not always the ones that have the greatest historical returns. The best strategies are those that work best for the individual investor's objectives and risk tolerance. In different words, investing strategies are like food diets: The best strategy is the one that works best for you.
Also, you don't want to implement an investment strategy and find that you want to abandon it for some hot new trend you discovered online. Don't get confused by all of the too-good-to-be-true flavors of the month. Stick to the time-tested basics.
So before making a commitment to anything, whether it be food diets, clothes, or investment strategies, see which works best for your personality and style. You can start by considering the top five investing strategies which are shown below, some of which are theories, styles or tactics, which can help you build a portfolio of mutual funds or ETFs.
Fundamental Analysis strategy
We begin with fundamental analysis because it is one of the oldest and most basic forms of investing styles. Primarily used for researching and analyzing equities (individual stocks, rather than mutual fund selection), fundamental analysis is a form of an active investing strategy that involves analyzing financial statements for the purpose of selecting quality stocks.1
Data from the financial statements is used to compare with past and present data of the particular business or with other businesses within the industry. By analyzing the data, the investor may arrive at a reasonable valuation (price) of the particular company's stock and determine if the stock is a good purchase or not
Technical Analysis strategy
Technical analysis can be considered the opposite of fundamental analysis. Investors using technical analysis (technical traders) often use charts to recognize recent price patterns and current market trends for the purpose of predicting future patterns and trends. In different words, there are particular patterns and trends that can provide the technical trader certain cues or signals, called indicators, about future market movements.2
For example, some patterns are given descriptive names, such as "head and shoulders" or "cup and handle." When these patterns begin to take shape and are recognized, the technical trader may make investment decisions based upon the expected result of the pattern or trend. Fundamental data, such as P/E ratio, is not considered in technical analysis where trends and patterns are prioritized overvaluation measures
Value Investing strategy
Mutual fund and ETF investors can employ the fundamental investment strategy or style by using value stock mutual funds. In simple terms, the value investor is looking for stocks selling at a "discount;" they want to find a bargain. Rather than spending the time to search for value stocks and analyze company financial statements, a mutual fund investor can buy index funds, Exchange Traded Funds (ETFs) or actively-managed funds that hold value stocks
Growth Investing strategy
As the name implies, growth stocks typically perform best in the mature stages of a market cycle when the economy is growing at a healthy rate. The growth strategy reflects what corporations, consumers, and investors are all doing simultaneously in healthy economies--gaining increasingly higher expectations of future growth and spending more money to do it. Again, technology companies are good examples here. They are typically valued high but can continue to grow beyond those valuations when the environment is right.
A nuanced version of growth investing can be found in the momentum investing strategy, which is a strategy of capitalizing on current price trends with the expectation that momentum will continue to build in the same direction. Most commonly, and especially with mutual funds designed to capture the momentum investing strategy, the idea is to "buy high and sell higher." For example, a mutual fund manager may seek growth stocks that have shown trends for consistent appreciation in price with the expectation that the rising price trends will continue
Buy and Hold strategy
Buy and hold investors believe "time in the market" is a more prudent investment style than "timing the market." The strategy is applied by buying investment securities and holding them for long periods of time because the investor believes that long-term returns can be reasonable despite the volatility characteristic of short-term periods. This strategy is in opposition to absolute market timing, which typically has an investor buying and selling over shorter periods with the intention of buying at low prices and selling at high prices.9
The buy-and-hold investor will argue that holding for longer periods requires less frequent trading than other strategies. Therefore trading costs are minimized, which will increase the overall net return of the investment portfolio.
Portfolios employing the buy and hold strategy have been called lazy portfoliosbecause of their low-maintenance, passive nature.
Timely response on Macro events
Focus on Micro-economic data
Demand, Supply, and Equilibrium: Prices are determined by the theory of supply and demand. Under this theory, suppliers offer the same price demanded by consumers in a perfectly competitive market. This creates economic equilibrium.
Production Theory: This principle is the study of how goods and services are created or manufactured.
Costs of Production: According to this theory, the price of goods or services is determined by the cost of the resources used during production.
Labor Economics: This principle looks at workers and employers, and tries to understand the pattern of wages, employment, and income
Macroeconomics is the branch of economics that studies the economy as a whole.
Macroeconomics focuses on three things: National output, unemployment, and inflation.
Governments can use macroeconomic policy including monetary and fiscal policy to stabilize the economy.
Central banks use monetary policy to increase or decrease the money supply, and use fiscal policy to adjust government spending.
John Templeton, famously successful value investor, who died in 2008 at the age of 95, shared a sentiment. "I never ask if the market is going to go up or down because I don't know. It doesn't matter. I search nation after nation for stocks, asking: 'where is the one that is lowest priced in relation to what I believe it's worth?'
The gyrations of financial markets can be startling. I am reminded of the following words of wisdom attributed to the economist John Maynard Keynes:
"The market can remain irrational longer than you can remain solvent."