Active investing

Active investing involves researching and selecting the market and individual stocks in an attempt to find undervalued assets and earn above-average market returns. Active investors often make trades and try to take advantage of market fluctuations to maximise profits.

Pros:

• Potential for higher returns: With good analysis and the right timing, active investing can offer higher returns than the market average.
• Ability to adapt to market situations: Active investors can react quickly to market changes and adjust their portfolio accordingly.

Disadvantages/Risks:

• Needs a lot of time and knowledge: Successful active investing requires constant market monitoring, analysis and knowledge.
• Higher trading costs: Frequent trading can lead to higher commissions and other transaction costs.
• Higher risk of making the wrong decisions: Incorrect analysis or timing can lead to significant losses.

Passive investing

Passive investing focuses on tracking the average return of the market, for example through index funds that mirror a broader market index such as the S&P 500 or OMX Tallinn. Passive investors buy and hold assets for longer periods, reducing the need for frequent trading.

Pros:

• Lower costs and taxes: Passive investing involves fewer transactions, which reduces commissions and the tax burden.
• Simpler and less time-consuming: Because passive investing does not require constant market monitoring, it is simpler and less stressful.
• Lower risk: Passive investing spreads risk more broadly by tracking the average market return.

Disadvantages/Risks:

• Limited possibility to cross the market: Passive investing follows the average return of the market, which may limit the possibility of higher returns.
• Less flexibility: A passive strategy may not allow for rapid adaptation to market changes.

The choice between active and passive investing depends on your financial goals, risk tolerance and time resources. Each approach has its advantages and disadvantages, and many investors use a combination of both styles in their portfolios to maximise returns and minimise risk.

Introduction

When choosing an investment strategy, it's important to consider the time horizon, i.e. how long you plan to hold your investment. Time horizon refers to investing for varying periods of time, which directly affects your risk tolerance and return expectations. The time horizon of an investment is one of the most important factors that will determine the way in which your investment portfolio is constructed and managed.

The time breakdown generally falls into two main categories: long-term and short-term investment. Both categories have their advantages and disadvantages and are suitable for different purposes and investor types.

Long-term investing

Long-term investing focuses on holding assets for years, or even decades, with the aim of maximising returns over the long term. This strategy often includes pension funds, real estate and quality stocks.

Pros:

• Potentially higher returns over time: Historically, long-term investments such as equities have offered higher returns than short-term investments.
• Less trading costs and taxes: Longer-term investments reduce the costs and taxes associated with frequent trading.
• Less stress and emotional strain due to market volatility: Long-term investors do not need to worry about daily market fluctuations.

Disadvantages/Risks:

• Longer waiting time for income: The benefits may only become apparent after years or decades.
• Market risks and business cycles can affect returns: Economic crises and market volatility can temporarily affect long-term returns.

Short-term investment

Short-term investing involves buying and selling assets over a shorter period of time, usually a few months or a year, with the aim of taking advantage of market fluctuations and making a quick profit. This strategy is well suited to speculative investing and market timing.

Pros:

• Opportunity to make a quick profit: Short-term investing can offer an opportunity for quick returns if market fluctuations are skilfully exploited.
• Flexibility to quickly change the investment portfolio: Short-term investors can quickly adjust their portfolio to market conditions.

Disadvantages/Risks:

• Higher risk and volatility: Short-term investing is often riskier and market volatility can lead to large losses.
• Higher trading costs and taxes: Frequent transactions increase trading costs and the tax burden.
• More time spent monitoring the market: Successful short-term investing requires constant market monitoring and analysis.

The choice between long-term and short-term investing depends on your financial goals, your risk tolerance and the time you are willing to commit to investing. Each strategy has its place and usefulness, depending on the investor's individual needs and circumstances.

Scattering

Diversification means spreading investments across asset classes and sectors to reduce risk. This strategy helps to protect the portfolio from market volatility.

Pros:

• Reduces risk and volatility
• Offers more stable returns
  Disadvantages/Risks:
• Opportunity for lower returns
• Needs a broad awareness of different asset classes

Dollar cost averaging (DCA)

DCA involves regular, fixed-amount investments regardless of market prices. This strategy helps reduce the risk of market timing and averages the cost of investments over time.

Pros:

• Reduces market timing risk
• A simple and disciplined approach

Disadvantages/Risks:

• Possibly not taking advantage of the best opportunities of market downturns

Alternative: A one-off investment where the entire amount is invested at once in an attempt to time the market low.

Read more in our article 'Dollar Cost Averaging: investing without forecasting'

Value averaging (VA)

Value Averaging (VA) is an investment strategy similar to Dollar Cost Averaging (DCA), but with some differences. The goal of VA is to keep the portfolio on a certain upward trajectory by investing more when the market is down and less when the market is up. Here are the principles of this strategy and some similar strategies:

Value Averaging involves assigning a fixed growth rate to a portfolio and adjusting investments accordingly. For example, if the goal is to increase the value of the portfolio by $1,000 each quarter, more is invested if the portfolio has declined and less if it has increased.

Value investing

The aim of this strategy is to find stocks that are undervalued and buy them, expecting their value to increase over time. This strategy requires careful analysis and patience. A well-known value investor is Warren Buffett.

Pros:

• Opportunity to buy shares at a bargain price
• Potential for high returns

Disadvantages/Risks:

• Requires a lot of time and knowledge
• Higher risk of making the wrong decisions

Momentum investing

Momentum investing, which focuses on stocks that have recently shown strong upward momentum in the hope that the trend will continue.

Investing in Inters

Compound interest is a concept where the interest earned earns interest, increasing the value of the investment exponentially over time. It is a key element of long-term investing.

Pros:

• Exponential growth in the long term
• Well suited for long-term investments

Disadvantages/Risks:

• Takes time to see noticeable results
• Requires discipline and patience

Alternative: Simple interest, where interest is earned only on the amount initially invested, not on the interest earned.

The focus will be on companies with high growth potential. Growth investors look for companies that have the potential to grow rapidly in the future, even though they may be overvalued now.

Investing in index funds that track market indices such as. S&P 500. This allows for a diversified investment at low cost and reduces the risk of selecting individual shares.

It looks for price differences between different markets or between related assets in order to achieve a risk-free profit.

Shares are borrowed and sold immediately, in the hope that their price will fall and they can buy them back later at a lower price, making a profit in the meantime.

Read more in our article 'Shorting - an investment strategy for the bold'

Options are traded which give the right (but not the obligation) to buy or sell an asset at a fixed date and price. Call options allow you to buy and put options allow you to sell.