Making Sense of your Investment Strategies

Investment strategies are defined as systems or approaches that shape an investor’s decision-making process for his or her portfolio. For example, value investing is all about undervalued stocks, selling for less than their potential worth. On the other hand, growth investing seeks opportunities in companies that promise long-term growth. Nevertheless, the best strategies are not always the ones that promise boatloads in returns or boast the greatest historical results. The best strategies are those that work best for your objectives while factoring in risk tolerance. All in all, the one thing that remains consistent in all investment strategies is the need to modify them with the current economic times. 

Why Diversification is Important to Your Portfolio

Diversification is an investment technique that allocates investments over various financial categories, instruments, and industries. Its primary focus is on maximizing returns by investing in uncorrelated areas. However, in times of market volatility, such as the 2008 crash, all the purported benefits of diversification somehow disappear. Assets everywhere tend to head south, yet diversified investors holding government bonds and gold were somehow cushioned from the ensuing mayhem. Still, most finance professionals agree that diversifying does not guarantee against loss; it’s still the essential component when aiming for long-range financial goals. 

Shifting From the Modern Portfolio Theory

The modern portfolio theory is an investment and portfolio management theory that highlights how investors can maximize a portfolio’s expected returns for a given level of risk by modifying the proportions of the assets in the portfolio. There’s an adage that goes: the higher the risks, the greater the rewards. Yet, when crafting investment portfolios, most investors will aim to create some balance between risk and reward. This is what is called the modern portfolio theory. And while it has its drawbacks, it’s still taught in schools and utilized heavily to this day, particularly among financial advisors handling stocks and bonds. 

As ubiquitous as the theory might be, it still has some shortcomings in the real world. For starters, critics argue that the approach doesn’t deal with the real world since all analysis is based on projected values about what is expected rather than present times. Secondly, it focuses on longer periods of time such that investors often miss out on short-term opportunities.