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Your Investing Strategy Defines How You Pick Stocks

Strategies Help You Focus on Stocks

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Many successful investors adopt an investment strategy that fits their goals and tolerance for risk. While there are many variations, most strategies fit within one or more of these:

  • Growth
  • Value
  • Income

Investment strategies can be fluid based on where you are in life (just starting out or preparing to retire, for example). However, that doesn't mean investors should jump from on to another and back again.

It is important to identify clear reasons for shifting your investment strategy, not because one strategy or the other is receiving a lot of media attention.

Market conditions may favor one strategy over the other. For example, when the market or a market sector is booming, growth strategies become the rage.

A down or declining market may favor the value investor. However, all strategies can work in almost any market conditions - sometimes the market makes easier than other times.

Growth Investors

As the name implies, growth investors look for the rising stars. They are interested in companies that have high potential for earning growth. High earning growth invariably leads to high stock prices - at least in theory. Growth investors are willing to bet on young (or not so young) companies that show promise of becoming leaders in their industry.

The technology stocks, especially during the late 1990s, were the perfect example of growth stocks. Many of these young companies started with an idea and nothing more and now are large successful companies.

Of course, a great many more of those same technology companies started out with an idea and nothing more and ended up where they started. Which is to say that growth investing carries the risk that some of your investments are going to fail. As much as Americans like success stories, there are more failures than successes when it comes to market leadership.

Value Investors

Value investors look for the stocks that the market has overlooked. Value doesn't mean cheap as in low per share price, but under priced relative to the value of the company.

These are stocks the market has passed over while chasing some other industry sector or more glamorous investments. The value investor looks for stocks with a low price/earnings ratio meaning the market is not willing to pay much in the way of a premium for the stock.

Of course, the value investor needs to make sure there in nothing wrong with the company that would warrant a low stock price other than neglect or market inattention. Assuming the company is solid, the value investor's strategy is to buy and hold the stock, anticipating the future time when the market will recognize the company's worth and bid the stock up to its true value.

In addition to extensive homework on the company and its role in the market, the value investor must be patient to buy at a great price - much below the true value. This gives her the margin for profit when the company's fortunes improve.

Income Investors

Income investing is the most straight-forward of all strategies and the most conservative. Income is the motivation and investors target companies paying high and consistent dividends.

People near or in retirement are fond of this strategy for obvious reasons. The companies that qualify for the income investor tend to be large and well-established. There is always some risk involved in investing in stocks, however this remains the most conservative of the investing strategies.

Income investors are more interested in current income and capital preservation. If the stock price increases, that's icing on the cake for the income investor who would probably trade some capital appreciation for a higher dividend.

These three investing strategies take in a large number of investors, however it is not required that you fall purely in one camp or another. As a practical matter, you will likely modify your investing philosophy as your life circumstances change.

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