Investment strategies
Your investment profileInvestment strategies - general tipsPopular investment strategies
Before setting your investment strategy, you must determine what kind of investor you are in light of your financial needs and circumstances. In other words, you need to determine your investment profile.
Your answers to the following questions will help you determine your investment profile:
What are your goals?
Why are you investing? Are you saving for your retirement or perhaps a new house or your children's school fees? Or are you simply looking for capital growth? Knowing your goals will help you determine which kind of investments will deliver the results you are looking for.
How long do you intend to invest for?
Generally the longer you give your investments, the better. A longer time frame tends to minimise your risk. Less than 5 years is generally considered short term, 5-15 years is considered a longer term investment period. If you are looking for short term gains, you may have to take a more aggressive stance by selecting speculative investments which carry a higher risk of loss but offer the potential for greater returns.
What is your attitude to risk?
Having established your goals and your investment timeframe, you need to establish your attitude to risk. Ask yourself, what is the maximum level of risk that is acceptable? Would you be comfortable if your investment lost 25% of its value? Generally the more ambitious your investment goals and the shorter the time frame allowed to achieve them the more volatile and riskier the investment. If you are not comfortable you may need to re-adjust your goals and timeframes.
So where do you see yourself?
| Investor type | You may: |
|
An Income investor |
be looking for share investments that pay a regular income |
|
A Retiree |
be looking to protect your investment capital and receive a regular income |
| A Wealth accumulator | be looking to grow your asset base |
| A Speculator | have ad hoc short term punting on share price movements |
| A Trader | have a disciplined short term trading plan to maximise the profitable opportunities in the market. |
Investment strategies
Here are some general tips for getting started:
| Tips | Strategies |
|
Diversify |
Spreading your investment funds across a number of different investments reduces your overall risk because you are not relying on only one asset to deliver returns. Diversification is a fundamental investment principle. |
|
Buy what you know |
be looking to protect your investment capital and receive a regular incomeBuying into companies that you know and understand means you can make an educated assessment about whether they pose a good investment opportunity or not. |
| Take a longer term view | Shares have an excellent long term track record of generating wealth. Share volatility reduces over the longer term, meaning if you choose your shares wisely, and invest with a long term view, history shows you generally will enjoy better returns. |
| Stick with your strategy |
Once you select your strategy you must give it time to work for you. Your overall investment goal is to earn a return better than inflation and allow that return to compound over time. If you chop and change, you will work against this goal. |
| Shares bring wealth through compounding | If you reinvest your dividends from shares (rather than take them as cash) |
Popular investment strategies
| Type of strategy | Explanation |
|
Value investing |
Value investing involves finding shares you believe are currently undervalued. To calculate this, the investor compares share price value with the company's intrinsic value, (e.g. what the business would be worth if it sold tomorrow). |
|
Growth investing |
Growth investing involves finding above average growth in earnings of shares (ideally at the start of the trend). Excellent management, or increasing market demand or a competitive edge can influence a company's potential for producing earnings and dividends higher than the market average. |
| Income investing | Income investing involves selecting shares in companies that pay regular dividends to derive a steady income stream from an investment portfolio. The benefits of franking may also reduce the tax payable on those dividends. |
| Top down investing | If you reinvest your dividends from shares (rather than take them as cash)Top down investing involves reviewing the Australian economy (and how it is affected by the global economy) for its impact on industry sectors and then choosing companies that will benefit from any impending changes. |
| Bottom up investing | If you reinvest your dividends from shares (rather than take them as cash)Bottom up investing involves researching individual companies, (rather than the economy at large), their business activity and potential, and assessing whether they are a worthwhile investment. |
Any advice on this page was prepared without taking into account the objectives, financial circumstances or needs of any particular person. Before acting on the advice you should consider the appropriateness of the advice having regard to your particular objectives, financial circumstances and needs. Where the advice relates to a financial product, you should obtain and consider the Product Disclosure Statement relating to the product before making any decision in relation to the product. To the maximum extent permitted by law, NAB and companies in the National Australia Bank Group expressly disclaim all or any liability which may arise out of the provision to or use by the recipient of this information and any other person.
