Investment approaches and strategies

A strategy is not the same as a product

A product is what you own. A strategy is how you make decisions about what you own. A broad index ETF can be a passive investor's entire portfolio, but also a tool an active investor uses to overweight one region for a while. A single stock can be a long-term holding for decades.

That's why it isn't worth choosing a strategy through a product (“I want ETFs”). Instead, ask yourself: how much time, know-how and decision-making do I want to put in?

Passive and active investing

A passive investor aims for the market return by owning a broadly diversified whole, usually an index. There are few decisions to make: which index to follow, how much to invest and how often to rebalance the portfolio.

An active investor tries to pick investments that will do better than the market, or to time their weightings. That takes more time and analysis, and costs and taxes are usually higher. Over the long term, the vast majority of active funds have fallen short of their benchmark index after costs.

Four practical approaches

Buy and hold. You make the investment for the long term and don't sell it when the market swings. This suits broadly diversified investments in particular.

Monthly investing. You invest the same amount regularly, whatever the market situation. The timing of any single purchase matters less. Monthly investing →

Index investing. You own the whole market through an index instead of picking individual companies. What is an index? →

Stock picking. You choose individual companies based on your own analysis. This takes the most time and accepts the largest deviation from the market. Stocks course →

Stock-picking styles

An investor who picks stocks usually emphasizes some particular characteristic. The styles don't rule each other out.

Every style has years when it does better than the others and years when it falls behind. That's why a portfolio built on a single style is more concentrated than it looks.

Core-satellite and portfolio structure

In the core-satellite model, most of the portfolio is in a broadly diversified core, for example a global index. A smaller share goes to satellites: themes, individual stocks or other asset classes. The model limits how much the active choices affect the whole.

A single-asset-class portfolio (for example stocks only) is simple but swings more.

A multi-asset portfolio combines, for example, stocks and bonds, so the whole swings less. The shares are maintained by rebalancing. Maintaining your portfolio →