The key to successful investing is having a clear strategy that aligns with your individual risk tolerance and predetermined financial goals. There are various techniques investors can incorporate into their investment strategies that can help them to build and maintain such a strategy in various market conditions.
Use this summary of our Investing Techniques course to recap some key techniques, consolidate your understanding of when and how to use them, and refresh your knowledge of the potential benefits.
The impact of behavioural finance
Rooted in psychological research, behavioural finance identifies predictable patterns of behaviour that explain some of the decisions investors make. These concepts provide insights into decision-making at both the individual and macro levels.
Understanding the reasons behind behaviours, rather than just observing them, helps investors grasp circumstances where irrational actions might occur. By acknowledging cognitive biases and emotional influences on investment choices, investors can better interpret market trends.
Tip: Leveraging insights from behavioural finance can help investors to avoid emotion-driven decision making.
Understanding your assets
Alternative investments are assets that fall outside the typical categories of stocks, bonds or cash. Almost anything that can be bought and sold can be considered an alternative investment. Popular markets for investors already holding traditional investments include:
- Commodities
- Real estate
- Private equity vehicles
- Hedge funds
- Structured products
- Collectibles (such as antiques or art)
- Cryptoassets
The alternative investment sector is broad and includes complex, high-risk assets. However, these assets commonly share two characteristics: they offer diversification for your portfolio and the potential for exceptional gains.
Tip: As always, a well researched investment strategy is essential for successful investing. Careful consideration is needed when choosing assets.
Ethical investing
Some investors choose to select assets based on the principle of “ethical investing”.
Whereas much traditional investing is solely concerned with which assets will rise in value to generate the most positive economic outcomes, ethical investors put a higher premium on what is morally and ethically correct, sometimes at the expense of the bottom line.
There are three main types of socially responsible investing:
| Environmental, social and governance (ESG) investing | Socially responsible investing (SRI) | Impact investing |
|---|---|---|
| Investing based on a company’s environmental, social and governance factors. | Trading based on moral and ethical issues. Choosing investment opportunities based on causes they want to support, or eliminate. These can be based on a variety of political and religious beliefs and life experiences. | Theoretically, the most altruistic form of ethical investing. Investing in organisations and projects investors believe to make a positive impact in the world, even at the expense of profit. |
Long-term investing techniques
The course covered various strategies for long-term investing. One of the most significant benefits of investing with a long-term focus is compounding; a powerful investing technique that can result in exponential growth of investment returns.
Compounding involves reinvesting any returns earned over the lifespan of an investment, converting received income into additional investment capital, and subsequently earning returns not only on the original investment but also on any income generated from it.
Tip: The key to successful compound investing includes stability, consistency, and discipline.
As the name suggests, buy and hold investing offers a convenient and relatively passive approach to investing through buying assets and holding them for the long term. The focus is on long-term potential and growth over time, as opposed to short-term gains.
- Long-term growth potential: Holding investments over time allows for compounding returns.
- Minimal trading activity: Less trading means lower transaction costs like fees and taxes.
- Simplicity: Buy and hold requires less time and effort compared to active trading.
- Opportunity cost: Tying up capital in long-term investments can mean missing out on short-term opportunities.
- Limited flexibility: Holding onto investments long-term can restrict responses to market changes or poor performance.
- Risk of holding poor performers: It can be challenging to decide whether to continue holding underperforming investments or switch to better opportunities, potentially missing out on higher returns.
Dollar cost averaging (DCA) is another long-term investing technique to spread out your investment into financial markets over time instead of investing a large sum at once. This strategy aims to simplify decision-making and reduce emotional reactions to market fluctuations.
DCA makes investing easier by breaking it into smaller, regular contributions. It encourages starting investments early and staying committed despite market ups and downs, ultimately helping investors navigate market volatility successfully.
Short-term investing techniques
Short-term trading can be carried out across various markets and asset classes, but traders often focus on markets with higher price volatility. This preference leads them to target growth stocks, indices, commodities, currencies and cryptoassets, rather than less volatile assets like bonds or blue-chip stocks.
Short-term trading strategies differ significantly from long-term investing. For example, short-term traders emphasise technical analysis over fundamental analysis in their decision-making process.
Divergences are a key tool in technical analysis for traders to detect early signs of market reversals and adjust their strategies. By comparing price charts with indicator charts, you can spot moments where signals differ, such as one indicating buy and another indicating sell. This helps in identifying and following trends for successful trading and investing.
Final thoughts
Successful investing requires a clear strategy aligned with your individual risk tolerance and personal financial goals. The course emphasises the importance of incorporating various techniques into your investment strategy, in order to navigate different market conditions effectively.
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This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.
eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.