3 Advanced Investment Strategies for Experienced Investors
21st Mar 2023
Financial Advisor Insights
11 Min Read
The world of finance is constantly evolving, and new investment strategies are emerging every day. Being up-to-date is critical for investors looking to amplify their returns with new and advanced investment strategies. Advanced investment strategies can require extensive research and practice and may take time to master. In most cases, studying them in depth before using them is advisable. It is also important to understand each strategy's key principles and tactics and their pros and cons.
Consider consulting with a professional financial advisor who can help you understand suitable investment approaches for your risk appetite, financial goals, and interests. In this article, we will explore some of the most effective advanced investment strategies used by experienced investors to help you take your investment strategy to the next level.
3 investing strategies for advanced investors to consider
1. Fundamental analysis
Fundamental analysis is a method used to evaluate the intrinsic value of an asset, such as a stock or a bond. It examines the asset's underlying economic and financial factors with the goal of determining whether an asset is overvalued or undervalued. Fundamental analysis considers an asset's financial health, market position, and growth prospects.
Fundamental analysis can be used for different types of assets, including stocks, bonds, currencies, and commodities. It is often used by investors who take a long-term investing approach and aim to buy undervalued assets or have the potential to grow in value over time. Fundamental analysis studies various aspects from the micro to the macro level. This includes the performance of a company, a sector, as well as the economy.
If you wish to conduct a fundamental analysis of a bond, you would have to do the following:
- Analyze the financial data published by the bond issuing company. This can include credit ratings and the changes in them. You can also go through the bond issuer's annual reports or 8-K, 10-Q, and 10-K filings.
- Secondly, you would check the reports mentioned above of other similar bond issuers to evaluate the bond market. This will give you an insight into the bond market at a given time.
- Lastly, you would check interest rates at the time of investment and the overall state of the economy. Macroeconomic factors such as interest rates can help you determine the health of the country's economy as a whole and whether or not it makes sense to invest in debt instruments at the time.
In the case of stocks, fundamental analysis can look like this:
- You can start by checking a company's press releases and financial statements to get an idea of its revenues, profits, future growth prospects, core principles, and more. It is also important to look for new releases and news related to the company, including shareholder patterns, corporate decisions, and more. Companies release annual reports that can offer information on investor relations, financial data, achievements, management, leadership, etc.
- Next, you can study the performance of the whole industry the company is a part of. For instance, if you wish to invest in the stocks of a tech company, you must first understand the state of the tech sector. You can look at competitors and their revenue, profits, return on equity, etc.
- Lastly, it is important to look at the domestic political environment that may impact the tech sector. You can look at relevant trade agreements, Gross Domestic Product (GDP), inflation, recession, unemployment in the sector, etc.
Based on your findings, you can determine whether or not investing in the stock or bond can positively or negatively impact your finances and future growth.
Fundamental analysis can be categorized into two main types:
- Qualitative analysis, which involves a subjective-based analysis. This approach examines qualitative factors such as a company's brand value, performance, corporate decisions, management decisions, etc., over time.
- Quantitative analysis, which involves a numerical-based analysis. This approach examines data, such as profit margins, financial statements, share price fluctuations, turnover rate, and more.
Pros and cons of fundamental analysis
Here are some of the pros and cons of using fundamental analysis:
- Fundamental analysis can help you understand the long-term viability of a company by analyzing its financial health, competitive position, management quality, and growth prospects.
- The strategy can identify stocks that are undervalued and have strong growth potential by analyzing a company's financial statements and economic indicators.
- Fundamental analysis can provide valuable information about a company's strengths, weaknesses, and potential risks, which can help form an investor's investment strategy.
- Fundamental analysis may not provide a complete picture of a company's stock performance in the short term. The complete picture may differ as market sentiment, and other macroeconomic factors can influence stock prices.
- The strategy can be time-consuming and requires a lot of data and analysis, making it difficult for novice investors to use.
- Some aspects of fundamental analysis, such as evaluating the company's management or assessing its competitive position, can be subjective, making it difficult to arrive at concrete conclusions.
2. Technical analysis
Technical analysis is an advanced investment strategy that is used in trading. It is a method of evaluating different securities, such as stocks, bonds, futures, currencies, etc., by analyzing different statistics generated by market activity. Technical analysis takes into consideration factors such as past stock prices and volume. It also uses various tools and techniques like charts, moving averages, oscillators, and indicators to analyze market data.
Technical analysis is often used with other forms of analysis, such as fundamental analysis, which focuses on analyzing a company's financial health and earnings potential. It is used to identify trends and patterns in market data that may indicate potential buy or sell opportunities.
Technical analysis follows 3 general assumptions:
- Stock prices move in trends: Technical analysts believe that share prices follow trends and are more likely to move per past performance than show sudden erratic movements.
- Everything is factored into the stock's price: Technical analysts believe that a share's price reflects the company's performance, fundamentals, and other market factors.
- History repeats itself: Technical analysts believe that history is likely to repeat itself with respect to price movements.
Types of technical analysis
Here are some of the most common types:
- Chart patterns analysis: This involves identifying recognizable patterns on price charts, such as head and shoulders, double tops and bottoms, triangles, and flags.
- Trend analysis: This method analyzes the overall direction of market trends using technical indicators like moving averages, trend lines, and channels.
- Momentum indicators analysis: This type of analysis focuses on identifying changes in market momentum using technical indicators such as the Relative Strength Index (RSI), Stochastic Oscillator, etc.
- Volume analysis: Volume analysis involves analyzing the trading volume of a particular security to identify potential trends and confirm other technical indicators.
- Fibonacci retracements analysis: This method uses the Fibonacci sequence (0, 23.6, 38.2, 50, 61.7 and 100) to identify potential support and resistance levels, which can help traders determine when to enter or exit trades.
- Elliott Wave theory analysis: This approach is based on the idea that market trends move in predictable waves or patterns, and traders can use these patterns to predict future price movements.
Pros and cons of technical analysis
Here are some of the pros and cons of using technical analysis
- Technical analysis is based on objective data, such as past prices and volume, rather than subjective opinions or emotions. Hence, it may be seen as a more accurate approach.
- Technical analysis may be more useful for short-term trading, as it can help traders identify potential entry and exit points for trades.
- Technical analysis can eliminate emotional factors from investing that can interfere with investment decisions.
- Technical analysis is solely based on market data and does not consider fundamental data, such as a company's financial health or industry trends. It may not provide a complete picture of an asset's value.
- Despite being based on objective data, technical analysis can still be subjective, as different traders may interpret market data differently.
- With a number of strategies and indicators, technical analysis may lead to confusion.
- Technical analysis is an advanced investment strategy that can be hard to grasp and follow and may take time for you to adopt and use.
3. Tactical asset allocation (TAA)
TAA is an advanced investment strategy that involves actively altering the asset allocation of your investment portfolio based on changing factors, such as market conditions, economic indicators, and others. TAA is used to take advantage of short-term opportunities and outperform the market or a specific benchmark. For example, if you think the market is headed for a downturn, you can increase the portfolio's allocation to bonds and move your money out of stocks. Likewise, if inflation has increased, you may increase the portfolio's allocation to inflation-protected securities, such as Treasury Inflation-Protected Securities (TIPS).
TAA is the opposite of Strategic Asset Allocation (SAA), which is a long-term, passive investment approach based on a fixed asset allocation mix. SAA does not alter the allocation to make way for short-term movements and fluctuations.
TAA requires you to analyze market data and economic indicators to determine the appropriate allocation mix. It requires you to be updated with the happenings in the market. And as with any investment strategy, you must carefully consider your risk appetite and investment goals before implementing a TAA approach.
Pros and cons of TAA
Here are some of the pros and cons of using TAA:
- TAA strategies may have the potential to generate higher returns by actively adjusting the portfolio's allocation based on market trends.
- TAA can lower risk by reducing exposure to asset classes that may be underperforming at a given time.
- TAA can help diversify your investment portfolio by investing in a wider range of asset classes.
- TAA strategies typically involve more frequent trading, which can lead to higher transaction costs and management fees. Frequent trading can also lead to higher capital gains taxes. This can negate the value of your overall returns.
- TAA requires making accurate market predictions, which is difficult to do consistently over time. The chance of error is quite high, and unless you are experienced and well-informed, you may make incorrect decisions.
- TAA strategies can be problematic for emotional investors. TAA requires discipline and rationality. Panic, fear and greed can interfere with TAA strategies.
6 things to keep in mind when using advanced investment strategies
Advanced investing strategies such as fundamental analysis, technical analysis, and TAA can offer potential benefits but also involve increased complexity and risk. Here are some key things to keep in mind when using these strategies:
- Before using any advanced investing strategy, it is important to understand how it works, what it aims to achieve, and the risks involved. This will help you make informed decisions and avoid common pitfalls.
- Advanced investing strategies require deeper research and analysis than basic passive approaches. Make sure you have access to reliable data, analysis tools, and expert advice to help you make informed decisions.
- Advanced investing strategies may involve more risk than basic strategies. Before using them, assessing your risk tolerance and ensuring the strategy aligns with your investment goals and risk profile is important.
- It is important to understand that no advanced investing strategy is foolproof. Even the best strategies can fail in certain market conditions. Diversifying your portfolio across asset classes can help mitigate risk and improve your chances of success.
- Advanced investing strategies may give you false confidence, leading to more risks than you can take. It may also lead to rash decisions based on incomplete information. Taking a disciplined approach and relying on data-driven analysis rather than emotions can help in this situation.
- Advanced investing strategies cannot be learned in one go. They may require constant practice and can be learnt with experience.
Advanced investing strategies require ongoing monitoring and adjustment to ensure they remain effective. You may need to regularly review your portfolio and adjust your strategy based on changing market conditions, investment goals, and risk tolerance. These strategies also require time and effort and cannot be learned overnight. However, you can incorporate them into your investment plan slowly. A financial advisor can help you understand these strategies.
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