Investment strategies can be the foundation of a secure financial future. Whether you’re new to investing or a seasoned investor, understanding the language behind these strategies is critical to making sound decisions. This thorough glossary defines key financial concepts and provides practical examples to help you confidently navigate the world of the stock market.

The Best Glossary of Investment Strategies

There is so much to learn when it comes to investing, and having a comprehensive resource like this glossary can be invaluable for someone getting started. With this knowledge at your fingertips, you can make informed decisions and build a strong investment portfolio for the future.

Basic Investment Strategies

Active Investing

Definition: A strategy in which investors or portfolio managers make numerous transactions with the intention of exceeding a market benchmark.

Active investing, for example, is when a fund manager often alters holdings in response to market trends.

Passive Investing

Definition: A long-term method for replicating the performance of a market index through the use of a diverse portfolio.

Investing in an S&P 500 index fund is an example of passive investing.

Buy and Hold

Definition: A long-term strategy for purchasing securities and holding them despite market changes.

For example, a buy-and-hold strategy involves an investor purchasing shares of a blue-chip business and holding them for decades.

Dollar-Cost Averaging (DCA)

Definition: Investing a preset amount on a regular basis, independent of asset price, to mitigate the impact of volatility.

For example, dollar-cost averaging can be shown by contributing a specific amount to your investment account each month.

Portfolio Construction and Management

Asset Allocation

Definition: The practice of allocating investments among different asset classes (stocks, bonds, cash, etc.) based on risk tolerance and goals.

For example, a portfolio made up of 60% equities and 40% bonds is a certain asset allocation approach.

Diversification

Definition: Diversifying investments among multiple assets to reduce risk by limiting exposure to any single asset or sector.

For example, diversification strategies include investing in both domestic and overseas equities, bonds, and real estate.

Rebalancing

Definition: Making periodic adjustments to a portfolio’s asset mix in order to preserve the appropriate allocation.

For example, if equities have grown to account for 70% of your portfolio, rebalancing may entail selling some stocks and purchasing bonds in order to achieve your aim of 60/40.

Portfolio Optimisation

Definition: The process of determining the appropriate asset mix to maximise return for a given degree of risk, frequently employing quantitative approaches.

For example, computer models can be used to simulate various asset combinations in order to find the most economical portfolio.

Core-Satellite Strategy

Definition: Combining a solid “core” portfolio of passive investments with smaller “satellite” positions that seek out specific opportunities for further returns.

For example, an investor may hold an index fund as the core and actively managed funds as satellites.

Investment Style Approaches

Value Investing

Definition: A method for purchasing securities that appear to be undervalued based on fundamental analysis.

For example, buying equities that are trading below their intrinsic value with the idea that they will correct over time.

Growth Investing

Definition: Investing in companies that are predicted to grow faster than the market.

For example, investing in tech businesses with great revenue growth potential, even if they have a premium valuation.

Momentum Investing

Definition: A strategy that consists of purchasing securities with an upward price trend and selling those with a downward trend.

For example, an investor may purchase equities that have increased by 20% in the previous six months, anticipating that the trend would continue.

Contrarian Investing

Definition: Investing against market trends by purchasing undervalued securities during downturns.

For example, purchasing quality equities during a market downturn, when most investors are selling.

Index Investing

Definition: A passive investment strategy in which an investor buys index funds or ETFs to imitate a specific market index.

For example, consider investing in a fund that tracks the Nasdaq Composite index.

Dividend Growth Investing

Definition: Concentrating on companies with a strong track record of rising dividend distributions in order to produce long-term income growth.

For example, consider building a portfolio of dividend aristocrats known for consistent dividend increases.

Sharpe Ratio

Definition: A risk-adjusted performance indicator that compares an investment’s excess return to its standard deviation.

For example, a portfolio with a high Sharpe Ratio is regarded as more efficient since it produces more returns per unit of risk.

Sortino Ratio

Definition: It is similar to the Sharpe Ratio but only incorporates downside volatility when calculating risk-adjusted returns.

For example, investors may prefer a portfolio with a greater Sortino Ratio to reduce the impact of negative returns.

Efficient Frontier

Definition: The set of optimal portfolios that provide the maximum predicted return for a given degree of risk, according to Modern Portfolio Theory.

For example, by charting multiple portfolios on a risk-return graph, an investor can determine whether portfolios are on the efficient frontier.

Modern Portfolio Theory (MPT)

Definition: A framework for building an optimal portfolio by optimising expected return for a given amount of risk through diversification.

For example, an investor can use MPT to diversify between assets with low correlations, lowering overall risk.

Monte Carlo Simulation

Definition: A statistical technique for modelling and forecasting the likelihood of multiple outcomes in a process with inherent uncertainty.

For example, Monte Carlo simulations are used by investors to anticipate the range of possible retirement savings results based on various market scenarios.

Leverage Ratio

Definition: A metric that assesses the amount to which borrowed funds are used to finance ventures, magnifying both profits and losses.

For example, a higher leverage ratio might result in significant rewards in a bullish market but increase risks in a downturn.

Advanced Investing Strategies & Tactical Approaches

Tactical Asset Allocation

Definition: A dynamic strategy that changes the portfolio’s asset mix in response to short-term market projections or opportunities.

For example, during market instability, briefly increase bond exposure before reverting to strategic allocation.

Strategic Asset Allocation

Definition: A long-term method that establishes target percentages for asset classes based on predicted risk and return, with few revisions.

For example, keeping a 70/30 mix between equities and bonds for many years.

Tax-Loss Harvesting

Definition: Selling securities at a loss to offset capital gains taxes while maintaining a balanced portfolio by reinvesting in similar assets.

For example, selling a stock that isn’t doing well in order to lower the taxable gains on investments that are doing well.

Asset Location

Definition: The method of allocating investments across different account types (taxable vs. tax-advantaged) in order to maximise tax efficiency.

For example, you may store high-dividend equities in a tax-advantaged IRA and municipal bonds in a taxable account.

Leverage

Definition: Using borrowed funds to improve the potential return on an investment while simultaneously increasing risk.

For example, buying stocks on margin is one way to leverage your investments.

Arbitrage

Definition: Making a risk-free profit by taking advantage of price variations between markets for the same item.

For example, acquire a stock on one market at a lower price and sell it on another at a higher price.

Hedging

Definition: Using techniques or financial instruments (such as options) to mitigate the risk of negative price changes in an investment.

For example, buying put options to protect against a stock’s price decrease.

Market Timing

Definition: Attempting to forecast future market moves and buying or selling accordingly to maximise rewards.

For example, selling stocks ahead of an expected market decline and then purchasing them back in when prices fall.

Analytical and Behavioural Aspects of Investing

Fundamental Analysis

Definition: Assessing a security’s inherent value using economic, financial, and qualitative elements.

For example, analysing a company’s earnings, financial sheet, and competitive position to determine whether its stock is undervalued.

Technical Analysis

Definition: The use of historical market data, particularly price and volume, to estimate future price changes.

For example, you can use moving averages and chart patterns to identify when to enter or quit a trade.

Risk Tolerance

Definition: An investor’s ability and willingness to tolerate changes in the value of their investments.

For example, a conservative investor may favour bonds over stocks because they are less volatile.

Risk Management

Definition: The process of detecting, assessing, and prioritising risks, followed by coordinated actions to reduce, monitor, and control the likelihood or impact of negative events.

For example, diversifying investments and putting in stop-loss orders to limit prospective losses.

Final Word

This glossary provides an overview of both fundamental and advanced investing strategy words. Incorporating these ideas into your investment strategy will help you create a more balanced and educated portfolio. Remember that effective investment is about developing a constant learning process rather than simply grasping every concept at first glance.

FAQs

What is an investment strategy?

An investment strategy is a collection of principles or strategies for choosing and managing investments. It enables you to achieve your financial objectives by balancing risk and reward.

How do I decide between active and passive investing?

The decision between active and passive investing is based on your objectives, risk tolerance, and time horizon. Active investment entails frequent trading to outperform the market, whereas passive investing seeks long-term growth by tracking an index.

What is asset allocation and why is it important?

Asset allocation involves diversifying your investments among various asset classes such as equities, bonds, and cash. Diversification reduces risk and can result in more stable profits over time.

Can I combine different investment strategies?

Yes, you can combine strategies. Many investors combine methodologies, such as value investing and tactical asset allocation, to build a diverse portfolio that meets their risk tolerance and financial goals.

What is tax-loss harvesting, and how can it help me?

Tax-loss harvesting is a strategy used to offset capital gains by selling investments that have experienced a loss, usually just before the end of a financial year, so that the losses can be carried forward in the next financial year to offset tax on potential profits in the future. This method can be particularly beneficial for high-net-worth individuals looking to minimise taxes on their investment gains.