Interest rates on cash savings can be a bit uninspiring, with some accounts offering a pitiful return on money held. In fact, when you take into account the effects of inflation, it’s not hard for money held in cash savings accounts to fall in real value. Over the longer term, investing can offer the chance for better returns.
It’s best to have a clear investment strategy in place that aligns with your circumstances, goals, and attitude to risk. We explain more about investment strategies and how to choose the right one for you.
Investment strategy is a fancy way of referring to a plan, or way of thinking, that shapes how you invest. The best strategy for you will depend on your personal circumstances, your attitude to risk and your goals. For example, the right investment strategy for a young person willing to take high risk in exchange for high growth might not be appropriate for a risk-averse investor later in life.
One approach to investing is, of course, to simply pick individual stocks and shares on a whim. But this isn’t terribly strategic and, sadly, basing your investment selections on gut feeling, or in an even more haphazard manner, is unlikely to reap rewards in the long term.
Of course, even with the right strategy, investments carry risk. The value of investments can go down as well as up. But choosing, and sticking to, a strategy that’s based on clear guidelines, should help you ride out any short-term stock market volatility and see you right in the long term.
At the most basic level, you’ll need to choose the type of investor you want to be. For example, do you want to be a “buy-and-hold” investor, where you seek out investments (shares or funds) that you think will perform well in the long-term, keeping your investments in place even in the face of short-term declines. This approach is reliant on you making solid choices upfront, but can result in decent returns for your investment over time.
The alternative is to take a more active approach, where you trade frequently to capitalise on market fluctuations. Or, of course, you can adopt a combination of the 2 approaches.
Within these 2 approaches there are a number of potential strategies around the specific investments you choose.
Arguably, there are as many strategies as there are investors. Everyone’s circumstances and goals will be slightly different. But most investment strategies will fall into one of a few main categories, including:
You may also come across something called “dollar-cost averaging”. This is less about what you invest in and more about how often and how much you invest. It can be used in combination with any of the strategies above. We’ll delve into this, and each of the investment strategies above, in more detail below. Some investors personalise their strategies by combining multiple strategy types.
This is a form of passive investing, typically in funds. Funds contain a range of shares and other assets selected by the fund manager. Investing in funds can spread your risk compared to investing in shares in individual companies. Index-linked funds, also known as tracker funds, aim to generate returns that are similar to the performance of a stock market index. These might include the UK’s FTSE100, or the S&P 500 in the US. It’s often seen as (comparatively) one of the safest investment strategies. While, by definition, you’re unlikely to outperform the market, it can deliver better returns in the long term than some more active approaches.
If you opt for a momentum investment strategy, you’re probably not someone who’s looking to buck any trends in your choice of investments. With this strategy, you’ll buy stocks and shares that have already gone up in value on the assumption they’ll carry on growing for at least a few months. You’ll also ditch any that are falling on the basis they’ll continue to do so. You need to be on the ball with this strategy. While trends can indeed continue for surprisingly long periods, they can also flip surprisingly quickly. You need to be ready to act when this happens to avoid facing the full force of this change in fortunes.
If you’re a growth investor, you’ll be on the look out for companies with high potential. Rather than opting for shares in companies that are already very successful, growth investors look for companies that are rapidly expanding, showing strong profit growth, and often reinvesting profits back into the business. While this may sound like a no-brainer strategy, and can be a good approach, of course it’s not without risk. Nobody has a crystal ball, and you only have to look back to the dot-com boom (and bust) of the 1990s for examples of companies that were showing stellar growth just before they collapsed.
If you love nothing better than rummaging through the metaphorical investment rails seeking out an overlooked bargain, then value investing could be your bag. Value investors are constantly on the hunt for gems that are trading at a discount to their actual value. And, if they get it right – and hold their nerve – they stand to gain if other investors later realise what they’ve missed and jump on the bandwagon, driving up the price. The potential rewards are therefore huge, but so are the risks. Sometimes, shares start out at a low price and stay that way (or even go down). So you may never get a chance to benefit from any rise.
Arguably, value investing is a form of contrarian investing, as you’re going against the crowd to seek out companies that many people wouldn’t touch with a bargepole. Other tactics can include buying when most investors are selling, and vice versa. The theory, unlike that of momentum investors, is that there is no point in keeping shares in an already successful company because there is limited opportunity for growth. Whereas if you buy when most people predict a downturn and ditch their investments, that’s when the growth opportunity is highest. Like value investing, there’s the potential for high reward, but this comes with high risk if the masses turn out to be right.
Usually seen as a relatively low-risk strategy, income investors prioritise more immediate earnings over long-term capital growth. They prioritise investing in mature firms in stable industries that pay out dividends. It might be more likely to be an approach favoured by those with sizeable investments, who rely on their investments for income rather than having other sources (such as employment).
This is an approach, rather than investment strategy per se. Instead of investing a large amount in one go, this is where you make regular (often smaller) investments in the market over time. Pound-cost averaging spreads the risk of poor market timing. It can be gut wrenching if, for example, you throw a big lump sum into the market just before it takes a downturn. The approach can be appropriate for those in a position to drip-feed a portion of a regular income into investments. Many investment platforms let you set up an automatic regular payment to make doing so easy. However, if you have a lump sum to invest at the outset, it’s not necessarily going to benefit you to hold back most of your lump sum just so you can take this approach. Typically, the longer you have money invested for, the higher the likely returns.
"If you’re new to investing, before getting into investment strategies you need to decide if investing is right for you in the first place. Start by asking yourself a few questions, including:
While investing has the potential for higher returns than cash in the long term, it might not yet be right for you if you have high-interest debts or other obligations, as you might be better off paying these off first. And it’s always a good idea to keep a few months’ worth of your regular income in an easy access cash savings account, just in case your income dries up (if you lose your job, for example). So if you don’t already have this, it should be your priority over investing.
Finally, investing is for the long-term. Experts generally recommend that if you can’t afford to leave your money invested for at least 5 years, you probably shouldn’t invest it. 5 years should give you enough time to ride out any short-term downturns in the market. So if you’ll need your money to buy a property in 2 years’ time, you might be better off seeking out the highest-interest savings account you can find.
In summary, sometimes the best investment strategy is not to invest at all. But if you can afford to, you then need to move on to picking the investment strategy that’s right for you as an individual."
First things first, there’s no such thing as the “best” investment strategy for everyone, and no strategy is risk-free. The right one for you depends on your goals and circumstances. So, if you have money that you can afford to invest, your first step should be to lay these out clearly. Think about:
Even if you’re investing in funds run by fund managers, rather than buying and selling stocks and shares yourself, it can be useful to know about the different strategies they might favour. That way, you can select the funds in your portfolio according to your own strategic preferences.
There are a few ways to get started with investing. The cheapest way to buy shares and funds is usually through a DIY online trading platform. These are sometimes called “investment supermarkets” because, like buying food in a regular supermarket, they offer a choice of stocks, shares or funds to invest in. You’ll need to pay a fee to use the platform, plus a range of charges for the funds or shares themselves.
You can also pay a financial adviser for investment help. They can either offer you one-off advice on how to get started, including the best strategy to adopt for your needs, or work with you and help you manage your investments in the long term.
There’s also a middle ground, in the form of robo-advisor investment platforms. These use clever, automated algorithms that ask you a series of questions. They use your answers to make recommendations and automatically invest your money.
If you’re new to investing, a stocks and shares ISA can be a good way to get started, as you’ll benefit from tax-free returns on up to £20,000 of savings or investments contributions per year. The £20,000 limit applies across both cash and stocks and shares ISAs, so if you’ve already put half of your allowance into a cash ISA, you can invest the other half into a stocks and shares ISA in the same year.
There are 2 main ways to invest in the stock market.
You might assume that you need to be pretty flush in order to start investing. But it’s not the case. It might have been true in the past that investing was largely the territory of the wealthy who could afford to pay for financial advice. But, these days, the availability and relatively low charges of DIY investment platforms have opened up investing to far more people.
In fact, you can often get started from as little as £500 as a lump sum, or a £50 regular monthly payment. You can sometimes start with even less. Some platforms may have higher minimum investments, so this might affect your choice. And if you’re investing in shares (rather than funds), you might want to start with a bit more in order to spread your risk and mitigate the impact of trading fees.
In fact, regardless of what type of investment you choose, make sure you scrutinise and compare fees before choosing an investment platform. Charges can vary dramatically, and some charge percentage fees while others charge fixed fees. Low, percentage-based fees tend to be best for those with only small amounts to invest. Flat fees can work out better for those with high-value portfolios.
An investment portfolio is the “basket” of investment assets that you hold. It can include stocks, shares and funds, as well as other forms of investment such as property, or government or corporate bonds (loans that are made to government or companies in exchange for interest).
As with investment strategies, there’s no right or wrong answer to this as it depends on your personal circumstances and attitude to risk. But the aim is to build a balanced portfolio that helps you meet your goals over a certain timeframe. It’s generally recommended that your portfolio includes a mix of different asset types, with higher or lower levels of risk. You can weight the proportion of assets according to your appetite for risk and how long you plan to hold the investments.
If you only have a small amount to invest, your ability to diversify your portfolio by buying lots of different assets will be limited. If this is the case, you might be best to opt for 1 or 2 funds that are themselves diversified across multiple companies and asset classes.
Yes. If you’re not sure where to start, or even if you’re already investing but decide you need some help to make your investments work harder, paying a financial adviser could be a worthwhile investment. Not only might they be able to recommend options to meet your needs that you wouldn’t have considered, but if they give you poor advice you will be able to complain and may be entitled to compensation. Some financial advisers won’t take on clients with less than a certain amount to invest though. Even if they will they may charge more than you’re willing to pay.
If you’re not sure how to find a financial adviser, online directories such as Unbiased and VouchedFor can be good places to start.
Many investment platforms offer online advice guides and tools to help you understand the ins and outs of investing and the types of account it’s worth considering. They won’t be able to offer personal advice tailored to your specific circumstances.
If you would welcome more targeted guidance, but baulk at the cost of financial advice, it’s worth considering a robo-advisor platform. These make fund recommendations and invest your money based on your answers to a series of questions about your goals and attitude to risk.
If you’re using a financial adviser or a robo-advisor platform, you shouldn’t need to do much research (beyond choosing the adviser or platform in the first place) as it will make recommendations for you.
If you’ve opted for the DIY approach, things to consider depend on whether you’re going for funds or investing directly in stocks and shares. Investment platforms will usually publish fact sheets about the investments you can buy through their websites, which are a good starting point.
If you’re choosing funds, look at things like:
If you’re investing directly in stocks and shares, you’ll need to do a bit more homework to pick the right ones in accordance with your investment strategy. Check:
| Response | |
|---|---|
| Purely financial | 29.93% |
| Neither, I have never held any investments | 27.01% |
| Mainly financial, but partly passion | 18.17% |
| Unsure | 12.15% |
| Mainly passion, but partly financial | 9.19% |
| Purely passion | 3.36% |
| Neither, I am driven by a different reason | 0.2% |
There’s no such thing as a completely “safe” investment strategy. Investing by definition carries risk, and the value of your investments can go down as well as up. But there are tactics you can use to reduce the risk of losses that will be detrimental to your goals.
There’s no silver bullet that guarantees investment success, but planning, research and sticking to your strategy will all help ease the way. Don’t invest more than you can afford to lose, invest according to your goals and appetite for risk, and don’t panic if your investments take a temporary dip. Short-term volatility is inevitable, and markets usually bounce back in the longer term.
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
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