Investment Strategies Flashcards

What is the primary objective of an investment strategy?

Answer: To create a structured plan for achieving financial goals

An investment strategy serves as a comprehensive roadmap designed to guide investment decisions towards specific financial objectives, such as retirement or buying a home. It involves defining risk tolerance, time horizon, and asset allocation, providing a disciplined approach to grow wealth over time. This structured plan helps investors make informed decisions and stay on track.

What does a growth investment strategy focus on?

Answer: Investing in high-growth potential assets

A growth investment strategy focuses on companies or assets that are expected to grow at an above-average rate, often reinvesting their earnings back into the business. These investments typically carry higher risk but offer the potential for significant capital appreciation. The goal is to achieve substantial long-term capital gains rather than current income.

What is the purpose of a value investment strategy?

Answer: To purchase undervalued assets and wait for their market value to increase

Value investing involves identifying companies whose stock prices appear to be trading below their intrinsic value, often due to temporary market overreactions or overlooked fundamentals. The strategy relies on the belief that the market will eventually recognize the true value of these assets. This leads to price appreciation as their market value increases to reflect their true worth.

What is a key principle of the buy-and-hold investment strategy?

Answer: Holding assets for the long-term without reacting to short-term market changes

The buy-and-hold strategy advocates for purchasing investments and retaining them for an extended period, often years or decades, regardless of short-term market fluctuations. This approach aims to benefit from the long-term growth of the market and minimizes transaction costs. It also reduces the risk of poor timing associated with frequent trading.

What is asset rebalancing?

Answer: Adjusting asset allocations to maintain the desired risk profile

Asset rebalancing is the process of periodically adjusting a portfolio's asset allocation back to its original target weights. Over time, market movements can cause certain asset classes to grow or shrink, shifting the portfolio's risk profile. Rebalancing ensures the portfolio remains aligned with the investor's intended risk tolerance and financial goals, preventing it from becoming too risky or too conservative.

What is a key difference between active and passive investment strategies?

Answer: Active strategies aim to beat the market, while passive strategies track it

Active investment strategies involve fund managers making specific investment decisions to outperform a benchmark index, requiring research and frequent trading. In contrast, passive strategies, like index funds, aim to replicate the performance of a specific market index by holding all or a representative sample of its securities. Passive strategies typically have lower fees and less trading activity.

What is a key advantage of the dollar-cost averaging strategy?

Answer: It reduces the risk of poor timing and market volatility

Dollar-cost averaging involves investing a fixed amount of money at regular intervals, regardless of the asset's price. This strategy averages out the purchase price over time, meaning more shares are bought when prices are low and fewer when prices are high. It mitigates the risk of investing a large sum at an unfortunate market peak, smoothing out the investment journey and reducing the impact of market volatility.

What is tactical asset allocation?

Answer: Adjusting the portfolio to take advantage of short-term market opportunities

Tactical asset allocation is an active management strategy where investors make short-term, deliberate deviations from their strategic (long-term) asset allocation. This is done to capitalize on perceived short-term market opportunities or to mitigate short-term risks. It involves overweighting or underweighting certain asset classes based on market forecasts, aiming to enhance returns.

What does the term 'asset correlation' refer to?

Answer: The degree to which assets move together or in opposite directions

Asset correlation measures how two different assets' prices move in relation to each other. A high positive correlation means they tend to move in the same direction, while a negative correlation means they tend to move in opposite directions. Understanding correlation is vital for diversification, as combining assets with low or negative correlation can help reduce overall portfolio risk.