Common Investment Strategies

Before you consider investing using the strategies summarized on this page, you should determine when you will need your invested money back (i.e. your time horizon); and your risk tolerance.

If you are comfortable taking on more risk, and have the time and interest to research potential investments, it may be right for you to pursue some of the common investment strategies summarized below. Whichever investment approach you use, remember that diversifying (i.e. not investing all of your money into one business, fund, industry, type of asset, etc.) will help reduce your risk of losing money.

Income Investing

Income investing is buying assets that generate consistent income, typically through dividends or interest. Instead of relying on stock price appreciation, this strategy emphasizes regular payouts to investors. It’s popular among investors looking for steady income.

Key Characteristics of Income Investing

More predictable returns: Investments often generate recurring income through dividends or interest payments.
Lower volatility: Many (but not all) income-producing assets, such as bonds or dividend stocks, can be less volatile than growth stocks.
Dividend-paying stocks: Companies with stable, free cash flow and a history of consistent or increasing dividends.
Fixed-income investments: Bonds and annuities provide reliable interest payments.

Examples of income investments include:

Stocks that have a history of paying consistent or increasing dividends.
Real estate investment trusts, which must distribute most of their income to unitholders.
Bonds (government, corporate, or municipal bonds).
Preferred stocks (hybrid investments that pay dividends like bonds but can appreciate like stocks).
Investment funds that invest in dividend-generating stocks and fixed income investments.

Risk Level of Income Investing

Income investing can be lower risk than growth investing but, like any investment strategy, it carries some key risks:

Interest rate risk: Rising interest rates and lower bond prices can affect returns for investors who sell.
Dividend cuts: Just because a company has a history of dividends does not mean it will continue paying those dividends. Companies may reduce or suspend dividends during downturns.
Inflation risk: Returns from fixed-income investments are often lower reflecting their lower risk, and returns may not keep up with rising inflation. Additionally, dividends paid typically reduce the capital appreciation potential of your investment, so if you don’t reinvest any dividends, that investment may underperform in the market.
Market fluctuations: While income stocks are more stable, they are still subject to stock market changes.

Who May Want to Consider Income Investing?

Investors seeking steady income.
More risk-averse investors looking for less volatile investments.
Long-term investors wanting to reinvest dividends for compounded growth.

Passive Index Investing

Passive index investing is an investment strategy that involves buying funds designed to passively track the performance of a specific market index, some of which are narrowly diversified (e.g. an industry segment) and some of which are broadly diversified (e.g. thousands of companies across the globe). Instead of selecting individual stocks, investors buy one or more index mutual funds or exchange-traded funds (ETF) that hold all the stocks within a particular index (or derivative investments that replicate holding those stocks). This strategy is widely used for long-term growth because, for investors who buy and hold such investments, return results are consistent with the underlying index. This approach can also enable low-cost broad diversification, which lowers risk-adjusted return. The costs of investing this way can be very low.

Key Characteristics of Passive Index Investing

Passive: You avoid having to research and trade individual company stocks.
Diversification: You can buy funds that offer broad diversification (i.e. invest in hundreds or thousands of businesses), which reduces your risk.
Lower fees: Some index funds have much lower expense ratios than actively-managed funds.
Market performance matching: Your returns will be similar to the underlying index return for the period you invested.

Examples of passive index investments include:

TSX Composite index funds (track most of Canada’s public market capitalization).
MSCI index funds (track a wide variety of regional and global businesses).
S&P 500 index funds (track the market capitalization of the stocks in the US S&P 500 index).
Nasdaq-100 index funds (track the market capitalization of the 100 largest stocks listed on the US NASDAQ market, which is where many US technology companies list).

Risk Level of Passive Index Investing

Passive index investing is considered moderate-to-low risk, but it depends on the index being tracked:

Broad market indexes: Lower risk due to diversification.
Sector-specific indexes (e.g. tech or emerging markets): Higher risk due to concentration in one industry.
No downside protection: Passive index funds decline when the overall market falls.
Potential underperformance vs. active funds in the short term: In strong bull markets, actively-managed funds might outperform index funds. However, research consistently shows higher returns from passive index investing over the long term.

Who May Want to Consider Index Investing?

Long-term investors looking for steady growth with minimal effort.
Investors who want a lower-stress, low-cost way to invest.
Those seeking diversification without actively managing their portfolio.

Value Investing

Value investing is buying companies that appear undervalued compared to their intrinsic worth. These stocks typically trade at a lower price relative to their earnings, book value, or other financial metrics. The idea is the market has temporarily mispriced these stocks, and over time, their true value will be recognized.

Key Characteristics of Value Stocks

Low price-to-earnings (P/E) or price-to-book (P/B) ratios: The company is “inexpensive” relative to their earnings or assets when compared to competitors.
Mature companies: Often found in established industries rather than high-growth sectors.
Dividend payments: Some value stocks pay regular dividends, providing steady income.
Market neglect or temporary struggles: Some value stocks are overlooked due to temporary challenges, negative news or investor sentiment, or economic downturns.

Examples of value investments include:

Lowest cost or most established companies in mature industries.
Companies in cyclical industries during downturns.

Risk Level of Value Investing

Value investing, when it reflects a significant “margin of safety” (the difference between what you paid and the book value per share), is generally lower risk than growth investing but, like any investment strategy, it carries some key risks:

Value traps: Some stocks that appear undervalued face emerging risks that have not yet been reflected in financial results. The company may need to reduce or eliminate its dividends temporarily or permanently.
Lower upside potential: Compared to growth stocks, value stocks may not generate rapid, or even any, gains.
Long-term time horizon: The market could take a long time to, or may never, recognize a business’s true value.

Who May Want to Consider Value Investing?

Investors with a long-term horizon (i.e. do not need invested money for at least five years).
Those willing to research companies and industries extensively to try to identify value opportunities.

ESG (Environmental, Social, Governance) Investing

ESG investing focuses on companies that meet specific ethical, sustainability, and corporate responsibility standards. Investors consider factors like climate impact, social policies, and corporate ethics alongside traditional financial metrics. The goal can be to align investments with personal values while still achieving financial returns. The goal can also be to achieve outsized returns over the long term by considering risks that may not be evaluated or may be undervalued by traditional investment strategies.

Key Characteristics of ESG Investing

Environmental: Companies with sustainable practices, low carbon footprints, and responsible resource management.
Social: Firms that prioritize fair labour practices, diversity, and community impact.
Governance: Companies with strong leadership, ethical decision-making, and transparent policies.
Long-term focus: Often includes companies investing in sustainability and social responsibility for future growth.

Examples of ESG investments include:

ESG-focused ETFs and mutual funds.
Renewable energy companies (e.g. solar, wind, and clean technology firms).
Companies following DEI (diversity, equity, and inclusion) best practices.

Risk Level of ESG Investing

ESG investing has non-financial factors and some other factors that increase risk:

Industry bias: ESG investors including funds often overweight sectors like technology and renewables, leading to less diversification.
Higher valuations: Popular ESG companies can trade at premium prices, making them vulnerable to corrections.
Regulatory and political risks: ESG policies can be affected by changing government regulations and public sentiment.
Performance uncertainty: It remains challenging to evaluate how ESG factors affect financial performance over the long term. ESG funds may underperform traditional investments, especially during economic downturns when investors shift toward profit-driven strategies.

Who May Want to Consider ESG Investing?

Investors who prioritize sustainability and ethical impact over financial results.
Investors who believe ESG-focused companies will outperform over the long term.
Those seeking to incorporate social responsibility into their investment strategy, for example by reducing exposure to carbon-intensive or socially irresponsible industries.

Growth Investing

Growth investing is investing in companies that are expected to grow faster than the overall market. These companies typically don’t generate profits, and reinvest any profits they do make into expanding their business rather than paying dividends, typically with the objective of dominating an emerging market. Growth stocks are often found in technology, healthcare, and emerging industries.

Key Characteristics of Growth Stocks

Growing business, not profit: Management is focused on rapidly expanding the business and not on generating income or controlling costs in the short or medium term.
Reinvestment over dividends: Instead of paying dividends, they reinvest any earnings into research, development, and expansion.
Market disruption: Many are innovators in their industries, driving new technologies or services.
Inflated valuations: Often trade at much higher price-to-earnings (P/E) ratios because investors are projecting future profits that would justify the current price.

Examples of growth investments include:

The fastest-growing companies in new industries.
Established companies that are still growing quickly because of high demand.

Risk Level of Growth Investing

Growth investing is higher risk because of:

Operational risk: Rapid business expansion can drain financial resources, strain processes, and overwhelm management, resulting in an inability to deliver on objectives.
Market volatility: Growth stocks tend to be more sensitive to market fluctuations.
Overvaluation risk: If a company fails to meet often lofty growth expectations, stock prices can drop sharply.
Economic sensitivity: Growth stocks tend to perform poorly in economic downturns since investors shift to safer assets.
No or very low dividend income: Since these companies reinvest earnings, if any, investors rely solely on stock appreciation for returns.

Who May Want to Consider Growth Investing?

Investors with a long-term horizon (i.e. do not need invested money for at least five years).
Those looking for capital appreciation rather than immediate income.
Those willing to endure market fluctuations for potential high rewards.

Momentum Investing

Momentum investing involves buying assets that have shown strong recent performance and selling those that are underperforming. The idea is that stocks that have been rising will continue to rise in the short to medium term due to market trends, investor behaviour, and positive sentiment.

Key Characteristics of Momentum Investing

Trend following: Investors try to ride the wave of recent winners and avoid laggards.
Short-term focus: Investments are often held for days or weeks rather than years.
High trading activity: Frequent buying and selling based on performance trends.
Technical analysis, not fundamentals: Relies on price strength (the rate of change in price movement over a period of time) and trading volume, not financial reports.

Examples of momentum investments include:

Buying a company stock after strong and sustained price increases over a relatively short period of time and selling it after it reaches a higher price.

Risk Level of Momentum Investing

Momentum investing is high-risk due to:

Market reversals: Trends can change quickly, leading to large losses.
Higher volatility: Stocks that rise quickly can fall just as quickly.
Frequent trading costs: More trading means higher transaction fees and taxes.
Emotional impacts: Chasing trends can lead to buying high and selling low if timing is off.

Who May Want to Consider Momentum Investing?

Active traders willing to monitor the market closely.
Investors with high risk tolerance looking for quick gains.
Those comfortable using technical indicators to guide decisions.
People who can handle short-term market swings without panic selling.

Speculative Investing

Speculative investing involves high-risk, high-reward investments where the potential for large gains comes with significant uncertainty. Investors focus on assets with huge upside potential but limited historical performance or unpredictable market behaviour. The strategy is based on anticipating price surges rather than long-term fundamentals.

Key Characteristics of Speculative Investing

Unclear business fundamentals: The business’s long-term prospects may be unclear.
High volatility: Prices can fluctuate rapidly within short periods.
Limited historical data: Investments may be in new or unproven markets.
Market timing and trends matter: Success depends on entering and exiting at the right time.
Little to no dividend income: Returns are mostly from price appreciation, not steady payouts.

Examples of speculative investments include:

Cryptocurrencies (e.g. Bitcoin, Ethereum, meme coins).
Penny stocks (low-priced, high-risk stocks with uncertain prospects).
Initial public offerings (IPOs) (new companies going public with unknown long-term success).
Options and futures trading (derivatives with leveraged risk).
Venture capital and startups (investing in early-stage companies with unproven business models).

Risk Level of Speculative Investing

Speculative investing is very high risk due to:

Extreme market swings: Rapid gains or losses can occur within days or hours.
Potential for total loss: Speculative investments routinely become worthless.
Emotional and psychological pressure: Fast-paced trading can lead to impulsive decisions.
Regulatory uncertainty: New and emerging asset classes face potential legal and policy changes.

Who May Want to Consider Speculative Investing?

High-risk tolerance investors who are willing to accept large or complete losses.
Traders looking for short-term opportunities rather than long-term stability.
Sophisticated investors who actively follow market trends and can react quickly to price movements.