In finance, an investment strategy is a set of rules, behaviors, or procedures designed to guide an investor’s selection of an investment portfolio.
These are often described as a tradeoff between risk and return: some investors will prefer to maximize expected returns by investing in risky assets, others will prefer to minimize risk, but most will select a strategy somewhere in between.
Surveys show that investors do not believe this and expect low risk and high return. As a result, they often end up with a “buy-high, sell-low” strategy. Investor education is “futile” and “totally discredited”.
Investment strategies are employed by investors who try to strike a balance between maximizing their profits from their portfolio and risk they are willing to take.
While passive strategies are often used to minimize transaction costs, active strategies such as market timing are an attempt to maximize returns.
One of the better-known investment strategies is buy and hold. Buy and hold is a long term investment strategy, based on the concept that, in the long run, equity markets give a good rate of return despite periods of volatility or decline.
A purely passive variant of this strategy is indexing, where an investor buys a small proportion of all the shares in a market index such as the S&P 500, or more likely, in a mutual fund called an index fund or an exchange-traded fund (ETF).
This viewpoint also holds that market timing, that one can enter the market on the lows and sell on the highs, does not work or does not work for small investors, so it is better to simply buy and hold.
The smaller, retail investor more typically uses the buy and hold investment strategy in real estate investment where the holding period is typically the lifespan of their mortgage.