Every investor needs to develop a series of strategies for investing. An investment strategy is a set of rules and procedures you use to pick investments, decide when to close positions, and match desired returns with levels of risk.
Investing without a specified set of rules and procedures is not advisable. You need to know what is an acceptable risk and how you are going to manage that risk through a range of selections in your portfolio. Many novice investors focus only on finding stocks they believe will increase in value.
Finding stocks with appreciation potential is not enough. You also need to limit your search to stocks with acceptable levels of risk.
Of course everyone wants to make a profit. But without an investment strategy, how do you know which stocks to buy and which are too risky? How long will you hold stocks? What rate of return do you expect, or what dollar amount of profit will generate a sale? These are basic questions, but if you do not ask them, then you have not defined acceptable risks, appropriate stocks, or procedures for selling when the time is right.
Buy and Hold Strategy
The first and best-known market strategy is called buy and hold. Under this plan, you decide which stocks meet your risk criteria and are fundamentally sound, pay an attractive dividend, and are in a sector you believe has exceptional growth potential. You then buy shares of stock, intending to hold them for the long term. Properly selected value investments are likely to work best in a buy-and-hold strategy.
A buy-and-hold strategy may involve purchase of additional shares in the future, reinvestment of dividends, and well-planned diversification to avoid unnecessary market and cyclical risks.
If you combine the standards of value investing with a buy-and-hold strategy (often thought to be part of the same investment strategy), you will probably seek companies that pay a higher-than-average dividend, that are leaders in their sectors, and that have at least a 10-year record of exceptional performance under a short list of fundamental indicators (see Fundamental Analysis).
Value companies share many attributes, including history of growing revenue and profits, higher-than-average dividends, and strong working capital controls.
Buy and hold tends to define an entire portfolio. Investors who are more conservative than average in their approach to portfolio management are likely to also be value investors. If you fit this definition, you probably will find yourself attracted to stocks that have a long history of outperforming not only the market in general, but other companies in their industry. This is one of the attributes of a value investment, and as part of the buy-and-hold approach, you are likely to be comfortable with the buy-and-hold approach to an exceptionally well-managed, competitive, and adequately capitalized company.