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Five investment strategies you should know

Dec 7, 2020.

There are a few basic rules that every investor should follow, regardless of the size of their assets. Generally, simple strategies are often more effective; they are less risky and usually offer better returns.

Those interested in investing money face a lot of questions right from the start. Of course, it makes a difference if you are able to invest CHF 5,000 or CHF 100,000. For smaller amounts of investable capital, individual securities make no sense: the transaction costs are too high and diversification too poor. Investment funds are recommended instead. In this article, we have compiled the five best investment strategies for investing your money successfully:

 

 

Strategy 1: invest early and keep costs low

Time is the investor’s friend. The earlier you start to invest, the more impressive the compound interest effect. If you invest CHF 15,000 at age 20 at an average return of 4 percent, you will have amassed a fortune of approximately CHF 88,000 by your 65th birthday. If you calculate a more optimistic return of 6 percent – which is quite realistic with shares – you will have total assets of around CHF 206,000.

 

With the longer time horizon, not only does the compound return effect become more impressive, but the danger of losses with riskier investments is also reduced. With an investment horizon of 35 years or more, the statistical probability of a loss is very low while the chance of high profits is relatively high. As a rule of thumb, you should have a time horizon of ten years or more for equity investments.

 

Besides the time aspect, inexpensive investment products are the investor’s friend as investing also means incurring fees. It is therefore important to keep a close eye on costs. You should always require financial product sellers and financial advisors to disclose all the costs and fees and explain them clearly, and to show you why they are fair and reasonable.

 

 

Strategy 2: spread widely and stay on course

Because it is difficult to make forecasts – about the stock market as a whole and especially about individual stocks – you have to spread your capital widely. Definitely avoid buying just a few shares – that can go drastically wrong. It is important that you are clear about the fact that risks cannot be avoided. This applies even if you leave your money in a savings account. Savings accounts earn very little interest and are exposed to risks, such as reducing in value due to inflation and account management expenses like custody account fees. But just because there are always risks, you shouldn’t become overconfident and aim for overly high returns. The rule is: higher returns can only be achieved with higher risk.

 

Generali tip

Aim for a realistic goal. A return of four percent after adjusting for inflation is quite possible in the long term.

 

Once you have decided on the right mix, it is important to stick to this strategy. Don’t turn everything upside down and incur unnecessary transaction costs at the first sign of headwinds. Don’t let the news of the day drive you crazy. All investors dream of selling at the price peak and buying again at the low point. But it is almost impossible to realise this in practice. This is why it’s better to always be present on the stock market. The main thing is to endure the pronounced price fluctuations of equities – or simply not to look at them.

 

Another reason why it is important to remain invested at all times is because the high long-term returns on equities can often be traced back to only a few days with very high price increases. Investors who have consistently invested in European equities since the beginning of 1999 have roughly doubled their investment to date (measured by the MSCI Europe stock index). However, this good performance is almost exclusively attributable to the ten best trading days in this period.

 

Generali tip

If you are not invested on just a few very good trading days, this can greatly reduce your total return over long periods of time. This is why it’s usually better to simply stay invested all the time.

“In the stock market, you can win or lose. By choosing the right investment strategy, you reduce your losses and increase your profits. And by finding the right balance between risky and safe investments, you have everything on your side to succeed in the long term.” 

Julien Braize, Sales Manager

About the author

Drawing on his 18 years of experience in the insurance and finance sector, Julien Braize has been Sales Manager at Generali in the Genève-Rive-Gauche region since 2014. He holds the IAF Certified Financial Advisor Diploma.

STRATEGY 3: REBALANCE FROM TIME TO TIME

Price gains and losses can not only test your nerves, they can also unbalance your strategy or, in other words, the right investment mix defined at the beginning of your investment. You should therefore rebalance from time to time to keep the percentage distribution of your assets constant.

 

EXAMPLE

Suppose your strategy is to invest your assets half each in equities and bonds. You select your investment products accordingly. If share prices rise and bond prices fall at the same time, the equity component can easily increase to become 75 percent of the total portfolio. The next step would then be to sell shares and buy bonds to restore the original distribution of assets. The opposite applies if share prices fall and bond prices rise.

 

By rebalancing in this way, you achieve a countercyclical strategy that, in the best case, will lead to you buying at low prices and selling at high prices. However, the more often you rebalance, the higher the transaction fees and the less you can benefit from longer-lasting price trends. As a rule of thumb,  review your portfolio every twelve months in order to determine if rebalancing is required. 

 

 

STRATEGY 4: STAGGER YOUR PURCHASES

There is a simple way out of the dilemma of not being able to know in advance whether stocks are currently cheap or not: staggered investment. If you inherit CHF 300,000 today, you shouldn’t just invest everything at once. It is better to do it at regular intervals over an extended period of time. Around CHF 50,000 today and then another CHF 50,000 every four months until the entire amount is invested after 20 months. Considered over the period as a whole, you thus invest at an average price and fare more cheaply (cost average). It also makes sense to invest subsequent amounts in stages.

 

You can easily invest in stages yourself. Various providers also offer savings plans and invest in a range of different funds. If you want to work with such a provider, you are best advised to choose one who invests your money in low-cost ETFs ((exchange traded funds). If you make regular deposits, you will achieve an average cost effect: more fund units are bought at low prices, less at high prices. It is also important to compare the costs here.

 

 

STRATEGY 5: LIMIT YOUR LOSSES

Yes, losses hurt – and when you sell the security, the loss is not just on paper, it is definitive and final. That is why many investors keep hold of a stock even though its price has fallen massively, in the hope that they will be able to sell it again for more than the acquisition price at some point.

 

It is also important to avoid losses because they are difficult to iron out again. If a share loses 50 percent, it then has to double in value for it to return to its starting price.

 

EXAMPLE

Share X falls from CHF 100 to CHF 50 – a loss of 50 percent. To get back to the starting price, it must now rise from CHF 50 to CHF 100, which corresponds to a gain of 100 percent.

 

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