Page 36 - DIY Investor Magazine | Issue 40

April 2024 36
DIY Investor Magazine ·
BARGAIN HUNTER, PART OF THE HERD, OR LONE STAR; WHAT IS THE BEST INVESTMENT STRATEGY?
You’ve set your objectives and found a level of risk you are comfortable with; now it’s time to build your investment portfolio. Christian Leeming says it’s very much like putting together your fantasy rugby XV
Rugby is a game for people of all sizes – successful teams combine strength with speed, dependability with flair, doggedness with elan - not a bad blueprint for an investment portfolio; secure your own ball with some stalwart investments, then look to score out wide with a couple of show-ponies.
Investors typically seek to balance defensive, cautious or adventurous investments and create a basket of products to deliver their desired outcomes without keeping them awake at night.
But finding your ideal investment style can be difficult, and may change according to individual and market circumstances; some investment strategies work best in certain market environments.
A Which? Report compared the performance of contrarian, momentum, value, growth and quality investing styles in the US over ten years with the performance of the S&P 500. Contrarian investing – buying and selling in contrast to prevailing sentiment – delivered the best returns, 303% over the period, while growth investing – seeking capital growth – returned 120%.
Value investing – hunting undervalued stocks – delivered 126% and quality stocks – those with certain characteristics deemed by the strategy to identify a ‘quality’ company, returned 128%. The S&P index returned 121% over the period, meaning only the contrarian strategy led to significant outperformance.
When This is Money looked at the growth of the MSCI all country momentum, value, quality and growth indices compared with the MSCI all country world index, FTSE 100 and S&P 500, results were rather different.
No individual strategy performed best on an annual basis globally, but generally one or two would beat the indices; so having a plan can work, but adapt it according to events.
Momentum and value stocks worked best in year 1; the following year growth and value stocks were the best global performers, with MSCI indices growing 25% and 27% respectively. This suggests that if you go ‘all in’ on a particular strategy, you would have to make a huge commitment to adapt as conditions change and have to time markets; probably a recipe for disaster.
Better then to build a balanced portfolio – make sure your front row delivers the stability and performance you need, and then go looking for a bit of pizzazz – different strategies, working together to deliver the results you want, whilst spreading risk. Here is a closer look at the various investing styles:
MOMENTUM INVESTING
Momentum investors find a stock on the rise and go along for the ride; they’ll buy high if they can sell even higher.
The theory is once a stock is on a roll, it will keep moving; the more money being invested, the quicker an asset’s value will rise.
Momentum investing works well where there is positive sentiment in a bull market, but having to time your entry and exit points make it a risky strategy.
CONTRARIAN INVESTING
Contrarian investors bet against the market and the fabled ‘wisdom’ of the crowd; they target stocks or funds no-one has considered or have become unloved, often making brave calls that conflict with existing top performers.