Historically low interest rates, little price movement on the stock exchanges: The situation on the investment market makes it difficult for private investors to make the right investment decisions and successfully build up assets. In view of the market environment, the right investment strategy is of crucial importance. With the right concept, private investors are successful even in the current difficult times. But which investment strategy is the best? Read here how to invest your money profitably.
No chance for chance: secure returns with the right investment strategy
Without a suitable investment strategy, success in investing is merely a matter of luck and rarely lasts. Successful investing and above-average returns are no coincidence, but the result of structured investment decisions that are based on a coherent investment strategy. The concept provides the guard rails within which the investment decisions move. Before deciding for or against an investment, the fundamental question must always be which concept the portfolio should be put together. Those who follow a strategy when investing money make their portfolio more secure from losses and at the same time improve their chances of achieving a stable total return across all investments.
EIGHT INVESTMENT STRATEGIES FOR SUCCESSFUL INVESTMENTS
The selection of the investment concept depends on various criteria such as return expectations, risk tolerance, investment horizon and, last but not least, the current market situation. Each investor decides for himself which specific investment strategy is the right one. In principle, private investors can choose between the following eight concepts, on the basis of which they decide which investments to include in their portfolio: Before deciding on an investment strategy or a mixture of several concepts, the private investor should clearly define what goal he is pursuing with the investment: Is it about building up assets or fulfilling a specific consumer desire, such as buying a property or a car? There is also the time aspect: In what time should the defined investment goal be achieved? The fundamental orientation of the strategy with regard to the duration and return of the investment is derived from the answers.
Turbo returns or long-term asset accumulation?
If a high return is to be achieved in a short period of time, private investors tend to have to take a higher investment risk. This means there is a chance of above-average profits, but also the risk of having to cut back on the return or, in the worst case, of suffering losses. On the other hand, private investors interested in long-term asset accumulation should spread their investments as broadly as possible over safe investments with relatively low potential returns. For a good total return, however, it is important to add investments to the portfolio that offer the opportunity for above-average returns. However, this always goes hand in hand with a higher investment risk. Without adding speculative investments to the portfolio, however, only a weak return can be achieved, particularly in view of the ongoing weak interest rates. In this respect, high-opportunity and high-risk investments are essential for every investor. The exact equilibrium of the relationship between opportunity and risk in the portfolio depends on the individual’s appetite for return, the ability to take risks, and the investment horizon. In both cases – with the fast return variant as well as with long-term asset accumulation – a number of investment strategies are ruled out. This quickly becomes clear when you take a closer look at the eight concepts mentioned.
INVESTMENT STRATEGY 1: RELY ON RAPID GROWTH
As the name suggests: With the growth strategy, the investment focus is clearly on the return. It has absolute priority when making investment decisions. Investors who focus their portfolio on growth, for example, invest in companies that have above-average growth potential. Often these are companies with innovative ideas that are predicted to be a great success.
Growth companies can often be found in the computer and software industries, as well as in the biotech sector. Often they are not yet making high profits. In the case of listed companies, investors can recognize this by their high price-earnings ratio (P / E). A high P / E ratio means that the share price, i.e. the market valuation on the stock exchange, is relatively high compared to the profit generated. The prices of growth companies are based only on future expectations and not on current business figures. This means that investors can benefit from high price gains if they are successful. However, if they make a profit, most of these companies will pay little or no dividends to shareholders. As a rule, they need all the financial means to cover the costs for research and development and thus ensure the company’s further growth.
Just as there is no guarantee that growth companies will receive dividends. Their market value is usually subject to strong fluctuations: Within a short period of time, very high price gains, but also significant drops, up to the total loss of the investment, are possible. Basically, the growth strategy is suitable for short- or medium-term oriented investors with above-average return expectations who are willing to take a higher investment risk for the prospect of higher investment returns.
Crowdinvesting as a potential source of returns
Crowdinvesting is an interesting alternative to investing in up-and-coming, listed companies. Startups, for example, finance themselves through crowd investing. But established companies also use the new form of financing to get innovative projects off the ground. Investors have the opportunity to participate in such potentially high-yield investments via crowd investing. The still young investment model is therefore a possible building block for private investors who pursue a growth-oriented investment strategy. Crowdinvesting is suitable as a speculative addition to a broad-based investment portfolio that is protected against possible losses and offers the chance of an above-average return.
INVESTMENT STRATEGY 2: BUY SAFE ASSETS
In contrast to the growth strategy, investors with the value strategy invest specifically in a value-oriented manner. The money flows into established companies with long-term stable profit development. The growth concept is very security-oriented and is considered a particularly conservative investment strategy. The value approach gives investors the chance of relatively steady price development and solid dividend payments. However, there is no guarantee of this, as the economic crises and the crises of individual companies show. Nevertheless, the investment strategy with a focus on “value” is suitable for long-term investors.
Long-term investments in companies with high value have not brought investors above-average, but relatively stable price gains and dividends in the past. The investment strategy is particularly interesting for investors who pursue the goal of building up assets over a long period of time while keeping the investment risk as low as possible.
Dividend yield: How shareholders benefit from corporate profits
The dividend yield gives private investors information about how interest is paid on a share. When calculating the dividend yield, the last dividend paid is compared with the current market value. In this way, shareholders can estimate what profit they can generate with their investment regardless of the price development of the share.
INVESTMENT STRATEGY 3: INVEST COUNTERCYCLICAL
The countercyclical investment strategy is particularly suitable for experienced investors who have a deep understanding of the market in which they want to be financially involved. The principle of countercyclical investing is simple: buy company shares when prices are low and sell them at a profit when prices rise. The practical implementation of the investment concept is, however, considerably more difficult.
Before investing, investors must first identify companies that are undervalued on the stock market but have potential for the future. But even with good timing and patience, it is by no means certain that the value of a company with potential will actually increase and that investors will be rewarded for their speculative investment in the form of price gains. The countercyclical investment strategy is therefore primarily suitable for risk-conscious private investors with market knowledge and a short to medium-term investment horizon.
Countercyclical investments have a chance of success not only in the event of severe shocks in the global economy. Investors can also take advantage of crises in individual sectors. Because crises offer investment opportunities. This currently also applies to the maritime industry. The shipping industry has gone through a deep crisis and is on the way to consolidation – an interesting investment target for investors pursuing a countercyclical investment strategy.
Invest countercyclically in the maritime industry
There are currently interesting investment opportunities in the ship market for countercyclical investors. The shipping crisis has led to a sharp market correction within the industry: a large number of older ships have left the market, which has resulted in a massive reduction in excess tonnage capacity. This trend is currently being continued by increasingly stringent, globally applicable environmental regulations. New editions are likely to lead to a further shake-out of the market, which will considerably improve the economic prospects for the remaining market participants. Investors can take advantage of this phase of the market shakeout by investing in the maritime industry, for example in the promising segment of multi-purpose freighters .
The shrinking supply of sea transport is offset by a growing demand: According to forecasts, sea transports, which already account for around 90 percent of world trade, will continue to gain in importance. As a result, investors who invest in this key industry now have the opportunity to benefit from increasing charter rates and an increase in the value of modern ships.
INVESTMENT STRATEGY 4: INVESTING MONEY PROCYCLICALLY
The opposite of countercyclical investing is procyclical. Investors who build their portfolio according to this investment strategy invest their money in companies whose market value has already risen significantly. The idea here: companies that have been successful in the recent past will continue to be so in the near future. Investors hope to benefit from further rising prices.
But timing is crucial with this investment concept. Less experienced investors in particular run the risk of getting in too late and only when the enterprise is at the height of its growth.Instead of making price gains, investors in such a case are at risk of losing money, at least in the medium term.
INVESTMENT STRATEGY 5: COLLECT DIVIDENDS
What interests are to savers, dividends are to shareholders. Because of the persistently low interest rates, many investors have now started withdrawing money from traditional investments such as overnight money and instead investing in shares of companies that regularly pay dividends. In this way, investors benefit not only from possible price increases, in the type of dividends, but also through their role in business earnings.
In view of the Corona crisis, however, companies around the world are increasingly cautious when it comes to dividend payments. Instead, they currently focus on securing their liquidity. Therefore, betting on dividends is not a good investment strategy in 2020. Due to the significant decline in profits of listed companies, stock market experts do not expect a turnaround in terms of dividend payments in 2021 either. As a sole investment strategy, focusing on dividends does not currently make sense. However, long-term investments in companies that pay their shareholders regular dividends tend to help stabilize the investment portfolio. Because the companies are usually solidly positioned, the investment is correspondingly secure. However, investors can usually only generate a relatively low return with this investment strategy.
INVESTMENT STRATEGY 6: FOLLOW THE INDEX
With the index strategy, investors invest in index certificates or ETFs that can be freely traded on the stock exchange (exchange-traded funds). This brings significant cost advantages compared to managed equity funds. In addition, the money invested is widely spread across a large number of individual companies from different industries. This gives investors more security than investments in individual stocks. Like all investments on the stock exchange, buying index-linked products only makes sense for long-term investors. ETFs are considered a relatively safe investment. However, a long-term bear market can jeopardize returns and the money invested. A total loss is also possible in principle.
INVESTMENT STRATEGY 7: BET ON “BLUE CHIPS”
With this investment strategy, private investors invest in large companies with a particularly high market value, so-called “blue chips”. They are the “heavyweights” in their respective stock index.
The idea behind the size concept: In the long term, these large companies only have to fear minor price fluctuations. High losses are possible, but unlikely. Conversely, however, investors cannot expect high price gains either. However, stocks in large companies usually bring security and stability to the portfolio of long-term investors.
INVESTMENT STRATEGY 8: BUY AND HOLD STOCKS
“Buy stocks, take sleeping pills, and stop looking at papers. After many years you will see: you are rich. ” This is how stock exchange expert André Kostolany (1906-1999) summarized his investment strategy. This method made the native Hungary a multiple millionaire over the decades, despite severe stock market crashes.
Kostolany’s investments were guided by the buy-and-hold strategy. It is designed for the long term and aims to buy stocks, funds or ETFs and keep them in the portfolio for a long time. The idea: Investors who sit out price drops in a disciplined manner, that is, “take sleeping pills”, can benefit from substantial price gains in the long term.