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Investment strategies

Which is the right investment strategy for you?

Managing your investment portfolio doesn’t end there when you buy an asset, you also need to manage your money. This is facilitated by several kind of investment strategy. Just like any tool, there’s no better or worse one, just one that fits your goals and personality better or less.

Portfolio management

Investment strategy security

You can choose from several ways to manage your money, the most important thing is that your money does not disappear from the chosen direction, you can do this by choosing the right direction (eg a given financial institution). An investment strategy allows you not to manage money on an ad-hoc basis, but systematically, based on a pre-arranged logic.

Of these, the two best known and most commonly used are:

  • active investment strategy
  • passive investment strategy

In addition, either alone or in combination with the above, they are also used:

  • momentum trading strategy
  • countercyclical investment strategy
  • buy and hold strategy

Whichever method you choose to invest in, it is natural that you can be guided by several main goals. These can be, for example:

  • value preservation: preserving the purchasing power of your money
  • capital accumulation: the achievement of a specific financial goal
  • security: to have more money than you started

As this is a significant amount of capital raised over time, the management of the investment is regulated in your best interest (In Hungary it is regulated by the Hungarian National Bank, as central bank). There is nothing to stop you from managing your own money on your own the way you want it to, but if you entrust it to someone else, he/she needs to be properly trained and licensed. If they can’t show this, promise anything, be careful with it.

Active investment strategy

One of the best known and most commonly used strategies. This is used by those who buy individual investment instruments (stocks, bonds) after proper market analysis. This investment strategy is also the most obvious for the vast majority of mutual funds.

The essence of this method is that after a proper market analysis, you decide (you or the investment manager decides this way) which assets and which areas to invest in.

How can you also manage your money through an active investment strategy?

By selecting an actively managed investment fund

Then the task is to choose the right investment fund for you, you can read in its description that it is managed in an actively managed or it is following an index automatically.

Yourself based on your existing experience

This is much easier said than done, so it is by no means recommended for beginners, after all, in the absence of the necessary experience, you are more likely to pay your tuition than your chances of winning.

With the help of a private banker

This is already a much better option, here the brokerage house or financial institution will provide you with a suitably qualified private banker. Here are some things to keep in mind before you decide:

  • depending on the amount invested: it is not certain that you are entitled to the service or
  • to the services of a financial institution: moving within a narrow range, don’t expect a miracle from the best professional
  • on fees: if the profit generated is taken by the bank, then it all makes no sense

We can help you choose the right private banker for you. Ask for help under the Contact menu to find out.

The advantage of an active strategy

In a portfolio managed in this way, the investment manager is free to decide in which investment he sees growth potential. There is always a specialist behind it, so it is possible to achieve beautiful results in changing conditions or even in a new market area.

The disadvantage of an active strategy

Resource intensive. You need to devote time and energy to analysis, and you need to have the right knowledge to have a good chance of choosing the right investment. This is why actively managed mutual funds are typically more expensive than their passively managed counterparts (and their fees must be paid even in loss-making periods).

Passive investment strategy

A passive investment strategy follows some pre-recorded pattern, typically copying some sort of index. This is how index-tracking mutual funds work. In an investment treated in this way, different investment instruments appear with the same weight as the copied sample. If their weighting changes in the original sample, the investment is automatically adjusted as well.

How can you passively manage your money?

You invest in an ETF

By investing your money in the right ETF for you, you have voted for a passive strategy by buying a single fund. I emphasize the right choice, after all, between ETF and ETF can be serious performance differences.

You select an index and you copy it yourself

You implement the same as an ETF, only to a small extent. For example, you buy from the top 5 securities of a given stock index according to their weight in the index. Before you dive into this solution, I would like to draw your attention to the fact that there may be a cost to buying and selling a security that you get away with through an ETF.

You keep a certain ratio in your investments

A relatively simple example: you decide to invest 50% of your money in a particular bond and the other 50% in a particular stock. Obviously, we are talking here about the tools chosen after a well-thought-out decision, not about whatever of them.

Then there are two possible scenarios:

  • the price of one of the assets goes up: up to both, but here you will work with the one that performed better. Then you sell it, realizing the exchange rate gain. Of course, only to the extent that when you shop for the extra money from the other asset, you keep the 50-50 ratio the same.
  • the exchange rate decreases: then you sell from the one with the higher exchange rate and buy from the one whose exchange rate has decreased. The dropped price means the purchase price, ie you get the same price cheaper.

This strategy works best in rising markets, in the case of a falling trend, it is not necessarily a good idea to apply it senselessly, as it also realizes exchange rate losses with you, not just profits.

The advantage of a passive strategy

It’s easy to copy market performance, a properly configured algorithm can even work without human help, so there’s no need to pay analysts. Examining the issue in mutual funds, ETFs can operate orders of magnitude cheaper than their actively managed counterparts.

The disadvantage of a passive strategy

An already overvalued security will be given more weight in a given index simply because of its price and its still lasting trading weight. This strategy will also buy when investment managers are more likely to choose to sell for actively managed funds.

Which one is right for you?

Not all investment vehicles are suitable for passive trading, just as not all investment vehicles are suitable for your type of investor. Take the test to find out which type of risk-taking you are and therefore which type of investor you are.

What type of investor you are?

Momentum trading strategy

You choose from potential investment opportunities based on their recent performance.

You can also use it completely on your own, in which case you can follow the significant increases of the recent past. If you have chosen the active strategy, you can supplement it with this method.

The advantage of the momentum strategy

There is no need to analyze different economic and geographical areas as well as companies one by one, saving a significant amount of time and energy.

The disadvantage of the strategy

You don’t analyze companies, so you don’t know exactly what’s behind the rise. Because of this, you do not know how long the ascent can last and when it is advisable to get out.

Countercyclical (contrarian) investment strategy

It trades against a wide range of investors. Buy when everyone sells and sell when the crowd buys.

It is important to emphasize the broad investor base. Where many people have sold, it is likely that many people will buy later, so it will not be a problem to find buyers or sellers.

The advantage of a countercyclical investment strategy

When the masses decide to sell, it has a strong downward effect, allowing them to buy at a significant “discount”. The same is true the other way around, when a particular investment vehicle is sought after by many, it has a price-boosting effect. By riding this, you can buy it cheaper and sell it more expensive than the normal market price, all without serious analysis.

The downside

Applying this strategy purely, you don’t analyze the processes, you just observe them, so you fall behind at the very beginning, you step in when the process has already started. In the case of purchases, it is not known how long you will be stuck in a position, ie when there will be a demand for the given asset again.

Buy and Hold strategy

A particular investment vehicle is held for a long period of time, even for many years.

During this time, although there is no exchange rate gain (due only years later, on the sale), the investor can also enjoy the returns of the given investment instrument (eg rent, dividends, interest, etc.), if it can be interpreted.

The advantage

If you don’t trade, you won’t have any trading costs either. This may not sound like much, but you can also see this as a kind of return. The other advantage is that by choosing the right device and keeping it for a long time, you will get into a relatively low point, so a significant exchange rate gain is almost guaranteed, and even the search for new boarding points will not take your energy.

The downside

You also need to plan for years in advance and have enough discipline so that you don’t have to get out of coercion halfway, don’t be seduced by the first boom, and don’t buy an asset you can wait until the end of time because it only produces a loss.

Questions:

  1. Which strategy do you feel closer to?
  2. How do you think you can coordinate multiple investment strategies between assets or goals?
  3. What is the return opportunity behind each direction?

You can contact us here with your question and I will be happy to read your post in the social media comment.

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