Are you thinking about how to develop an investment strategy? If you are we’ll get the basics out of the way first – those things that you need to consider if you’re thinking of trying to grow your assets through investments.

Your investment strategy is essentially your overarching plan for the decisions you make about your investments. And those critical first decisions – made even before you’ve committed a penny anywhere – will cover everything. From deciding what you want to achieve through the investment (for example, a comfortable retirement) and  the amount of risk you’re willing to take to the access you’ll need to the capital itself over the period of your investment. You might also need to decide the extent to which you want your funds to be invested ethically, whether you’re trying to quickly grow your capital or, simply protect your wealth with a more conservative strategy.

Here at Holborn Assets, we consider a diversified portfolio to provide the surest safety for a family’s financial future. But how else might you develop your investment strategy so that it supports your life goals?

Look for momentum

Of course, investing for growth is a tried and tested strategy for many investors. Essentially you’re looking for stocks in those industries that are enjoying a stage of their market cycle where things are on the up. With the expectation that this will continue for the foreseeable future as companies are willing to invest heavily to sustain the growth. The tech industry is a great example of this kind of market. But building on this basic strategy, we’d suggest that a version of this – momentum investing – is also an interesting potential investment strategy to investigate. Again, it’s all about closely watching pricing trends and timing your investment based on an understanding that the market is entering a mature stage of its growth cycle. You’re looking for a long-term consistent appreciation in value. The theory here is that once a stock starts moving in a particular direction it is more likely to continue in that direction – hence ‘momentum’ – than not. If you’re looking to invest in this way then you’ll need to spend a lot of time looking closely at market indicators that will give you clues as to the direction a given trend is moving in.

Identifying real value

An alternative to investing for growth is value investing – a strategy popularised by Warren Buffet – that is showing signs of a comeback despite the recent success of strategies based on growth stocks such as Netflix or Apple. Andrew Folsom, Senior Investment Analyst at the Wells Fargo Investment Institute, points to figures that show that 68 per cent of active US value managers outperformed their targets during 2017. A sign that the strategy of looking for undervalued stocks is once again gaining in popularity.

We’d add a word of warning here though. Many value investors look for low price stocks in companies with high earnings. But be aware of the difference between genuinely high earnings and what U-Wen Kok, Jason Ribando and Richard Sloan, in their recent paper Facts about Formulaic Value Investing, call ‘temporarily inflated accounting numbers’. Make sure that the stocks you are looking at have true value, rather than being simply stocks in a business that has a temporary forecast of high earnings. By this, we mean that simply basing your value investing strategy on low price-to-earnings ratios – and concluding that these stocks will therefore be valuable – is flawed. According to their research, the ratios “don’t really reflect the true, underlying economics of the companies,” says U-Wen Kok. “You still need to have a pair of human eyes.”

Hard work and good judgement

And that’s a position we’d agree with here at Holborn Assets. As you develop your investment strategy, you’ll find that growth trends are hard to spot, and that value is a hard thing to pin down.

Ultimately, you’ll need to put the hours in to identify the opportunities that work for you. Our final piece of advice is that if you don’t completely understand what you’re investing in, then don’t invest in it until you do.