Investment Strategies

9 Basic Investment Strategies
Here are some basic investment strategies that every investor should be aware of. New investors particularly should take note of them and request a full explanation from their investment adviser if they don’t understand them.

Here are 9 basic strategies to apply in the USA:

1. Start your investment programme as soon as you can.
The sooner you put aside funds for investment the better. Although this sounds simple, many people consider investment, but take a long time to start.

It is a good idea to save a fixed amount every week and set it aside for investment so the process of investment is automatic and the funds used for investment are not lost in other less important areas. The best way is to arrange for a direct credit into your investment bank account from your salary, or from your main bank account.

If your investment is a savings account earning interest, then the earlier you start the better. At the beginning, the amount is not as important as the fact that you have commenced saving and you have committed yourself to the long-term investment plan. Regular savings and regular investment is a sound strategy.

Because it is automatic it does not enter into your calculations and what is left over will be used for living expenses etc. The earlier you start saving, the greater the magic of compound interest kicking in to help grow your savings investment.

Compound interest is receiving interest on the interest already paid and added into your investment. That is, it is earning interest on top of interest. While this feature may not appear very important, if you do the calculations over a period, the amount accumulated through compound interest will stagger you.

2. Be happy with the level of risk.

You need to be totally happy with the level of risk in the investments you have decided to purchase. Naturally you have to weigh up the risk factor with the likely returns and professional advice may be required if you are new to this scene.

As explained, risk is the potential that the rate of return you anticipate from an investment will not be as expected and in a worse case scenario your full investment asset could be lost. This means the greater the potential of the return not matching up as expected, the greater the risk.

All investments earn some form of income return whether by way of interest or dividends, or rental income, but as far as capital return is concerned it is only the high-risk investments that can produce these returns to any great extent. This is obviously because share prices as well as property prices will rise and fall, depending on the mood of the economy. If a country and a people are doing well then these high risk investments come out on their own as being a good asset to put your capital into.

High-risk investments are suited to a longer-term investment strategy because it has been proven from statistics that they perform the best if retained for a number of years, but can result in lower returns if looking at the short term. Other types of investment such as artwork and jewellery are also high risk, but can pay very substantial dividends by way of capital gains when realised.

3. Make sure you are debt-free.
If you have debt costing you high interest, it is better to use your savings to clear these debts before you invest. You may be paying an interest of 10% or more on a debt, whereas the amount you would receive from a particular investment by deposit is say 5%. It is therefore good strategy to pay off the 10% interest debt first before trying to achieve the 5% income return on an investment. All that’s happening is that by paying off the debt you are in effect receiving a high return of 10%, which is higher than the 5% the banks or institution would give you as per the example.

Once you’ve cleared all your expensive debts you can set aside a fixed amount for saving and slowly build up your investment portfolio. If you have a mortgage on your home then once the mortgage is clear use the same amount you would have normally paid into the mortgage for investment. That is, redirect that same figure into investment so it will start to grow and multiply for you. It doesn’t have to be just your mortgage; it could apply to any particular debt.

The fact of the matter is you weren’t using that amount allocated to repay your mortgage or other debts and therefore your spending has already been fine-tuned not to take that sum of money into account.

If you can put that amount aside for your long-term investment programme you will achieve 2 things:

  1. It will no longer be a loss of funds being used to pay others because it is now retained for your use.
  2. Instead of giving you a negative return (you don’t get a return from your mortgage except an increase in value of property) you are now able to grow that money as part of your investments.

4. Spread your risk.

Spreading your risk is known as diversification. If you mix your investments amongst a number of different investments, each with different risk factors as well as returns, then this will give you a selection to help minimise risk by not putting 'all your eggs into one basket'.

You obviously have to make a selection suitable to your circumstances and investment goals. It also needs to take into account your requirements and attitude as far as capital gain or risk is concerned. You may start off with some simple investments, which are secure and produce a small income return. As you get more confident and familiar with the investment scenario, branch out into other types of investment and expand your portfolio. It is good to mix your investments with high risk and low returns and others with low risk and high returns.

The important thing is to ensure that there is a spread so you are not caught with one particular investment going bad, but because you have diversified your portfolio the risk is diminished considerably.