Introduction
Investing isn’t just about what assets you choose, but also how you approach investing. An investment strategy is basically a plan or style that guides your investment decisions based on your goals, timeline, and risk appetite. Here are some common types of investment strategies:
1. Long-Term Buy and Hold: This strategy involves selecting investments you believe will perform well in the long run and holding onto them, largely ignoring short-term market fluctuations.
For example, you identify solid companies (blue-chip stocks like Safaricom, EABL, Equity Bank) or prime real estate, and you invest in them with a plan to hold for many years (5, 10, 20+ years). You’re essentially betting on the long-term growth of these assets.
Many successful investors adopt this – e.g., if you bought NSE shares during a dip and held, reinvesting dividends, over a decade you could see substantial returns despite interim ups and downs. The key here is patience and conviction in the asset’s fundamentals. This strategy minimizes transaction costs and the stress of constant trading. Warren Buffett’s style globally is a classic “buy and hold” approach. In Kenya, someone might buy government bonds and simply hold to maturity, or buy land in an area expecting urban expansion and sit on it.
2. Income Investing: This strategy focuses on generating regular income from investments. Here, one might seek assets that pay consistent dividends or interest, rather than those that just appreciate in price.
For instance, an income investor might load up on high-dividend stocks (like some utility or banking stocks that pay good dividends), Sacco deposits for interest, rental properties for rent, or long-term bonds for coupon interest. The idea is to build a stream of passive income. Retirees or those seeking to supplement their monthly cash flow often use this strategy.
In Kenya, a retiree might invest heavily in Treasury bonds such that every 6 months they receive enough interest to cover their expenses.
3. Growth Investing: This involves targeting investments that have high potential to grow rapidly in value, even if they don’t pay much income now. Growth investors often look at young or fast-expanding companies (which usually reinvest profits rather than pay dividends).
On the NSE, this could mean favoring sectors like technology or fintech (though our market is limited in tech listings), or smaller companies expected to become much bigger. It could also mean investing in a promising startup or buying land in a currently cheap area that could boom if a major highway or project comes (like those who bought around Konza technocity early, hoping growth comes).
Growth investing tends to carry higher risk – not all growth prospects pan out – but can yield high returns if you pick winners.
4. Value Investing: This strategy is about finding assets that are undervalued by the market – in other words, priced lower than their intrinsic worth – and buying them, expecting the price to correct upwards eventually. It’s like bargain hunting.
On the stock market, value investors look at fundamentals (earnings, assets, etc.) and identify stocks that have low price-to-earnings or price-to-book ratios relative to peers or historical levels, assuming the company quality is good.
For example, if a solid company’s stock is beaten down due to temporary bad news or overall market decline, a value investor might buy in at the cheap price and wait for recovery.
In Kenya, value investing could mean looking at certain NSE stocks that have fallen out of favor but have strong underlying business, or even buying real estate during a lull (like when property prices dipped around 2017, savvy investors swooped in). It requires analysis and sometimes contrarian thinking (going against the crowd).
5. Dollar-Cost Averaging (Systematic Investing): This is more a method than a strategy per se, but it’s worth noting. It involves investing a fixed amount of money at regular intervals (say monthly) regardless of market conditions.
By doing so, you buy more units when prices are low and fewer when prices are high, averaging out your cost. For example, you decide to invest KSh 5,000 in an equity fund every month. Some months the unit price is high, some months low, but you keep buying – over time, this smooths out volatility.
Many salaried folks use this approach via saving plans or unit trusts. It instills discipline and removes the guesswork of trying to time the market.
6. Speculative Trading: This is a high-risk approach where one frequently buys and sells to profit from short-term price movements. Day-trading stocks or forex is speculative.
In Kenya, a few might trade stocks in and out when news hits (e.g., trying to flip a stock in days or weeks on momentum) or even trade global forex/crypto markets for quick gains.
This strategy requires a lot of time, expertise, and risk tolerance. It’s more like trading than investing, and many financial advisors caution that it’s easy to lose money with frequent trading due to fees and mistakes. It’s generally not recommended for beginners or those without a solid financial cushion.
7. Balanced (Mixed) Strategy: Many investors adopt a balanced strategy, holding a mix of asset classes to balance growth and income, risk and return.
For example, a balanced portfolio might have 50% in stocks (for growth) and 50% in bonds (for stability and income). Or some mix like that (maybe plus some real estate or alternatives).
The idea is to not put all funds in one type of investment strategy. Balanced mutual funds do this for you by holding both equities and fixed-income assets and rebalancing as needed.
8. Reinvestment Strategy: This refers to what you do with your returns. A common effective strategy is to reinvest all earnings (dividends, interest) rather than consuming them, at least until you hit your goal. This ties in with compound interest – by reinvesting, you buy more assets that then generate their own returns.
For instance, if you have shares that give you dividends, you use the dividends to buy more shares; if you have a money market fund paying interest, you keep the interest in the fund to earn interest on interest. This accelerates growth dramatically over long periods.
Which strategy is right?
It depends on your personal situation:
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If you are young and saving for a far-off goal (retirement, or simply wealth accumulation), a growth-oriented or balanced strategy with a long-term view (and reinvesting returns) might suit you.
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If you have a short timeline (maybe saving for a house down payment next year), you’d avoid high-risk strategies and stick to capital preservation (like bonds or MMFs).
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If your goal is to generate current income (maybe you want to supplement your salary or you’re retired), an income strategy focusing on dividends, rent, interest would be apt.
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Many people actually combine strategies. For example, you might put part of your money in long-term growth stocks and another part in bonds for stability (balanced approach). Or you might systematically invest monthly (dollar-cost average) while also trying to pick some undervalued stocks (value investing) for extra return.
Important is that whatever strategy you choose, it should be based on research and a plan, not emotion. Knee-jerk reactions to market swings (like panic selling when prices drop or exuberant buying in a frenzy) can derail any strategy.