Investment strategy: your roadmap to returns

An investment strategy is the way an investor seeks to generate returns. For example, by investing in stocks that pay relatively high dividends or by using futures on scarce commodities. Or, perhaps a little less risky, by investing in government bonds of eurozone countries.

Many different investment strategies have been tried over time. Some have proved so effective that they are now widely used and hardly recognised as a strategy. One example is diversification, also called spreading, as a way of improving the risk-return ratio. This strategy has been scientifically studied as the Modern Portfolio Theory and won the researcher, US economist Harry Markowitz, a Nobel Prize.

Diversification to optimise the risk-return ratio can be applied by investors in a variety of ways. Examples include diversification across geographical regions, asset classes such as equities, bonds, real estate, commodities, derivatives and currencies. There is even diversification across buying times, so as not to be dependent on the prices of a single trading day, which is discussed in more detail below.

Perhaps the most important form of diversification is through asset allocation, also known as the asset mix. Long-term asset allocation forms the strategic core of most investment plans and is therefore referred to as strategic asset allocation. It defines the ranges within which the portfolio weights of the various asset classes are allowed to vary. A temporary deviation from these averages, in order to respond to short-term developments and opportunities, is called tactical asset allocation.

Within the asset allocation, the ratio of ‘marketable securities’ (equities, real estate and alternative investments such as commodities and derivatives) to ‘fixed income securities’ (bonds and cash) largely determines the risk profile. As a rule of thumb, the bigger the part of marketable securities versus fixed-income securities, the higher the risk of the portfolio. In other words, the more the total market value of the portfolio can fluctuate from day to day.

Investing means accepting uncertainty. After all, the stock market can go up but also down. In times of sharply falling or rising stock prices, a clear plan can be of great value to help investors stay the course by sticking to their plan. This is especially true for the aforementioned relationship between (predominantly riskier) marketable securities and (generally less risky) fixed-income securities. An example makes this clearer.

Suppose an investor has a portfolio with a neutral (or ‘balanced’) allocation (50% equities, 50% bonds and cash). Then, after a sharp fall in the equity markets, say by 20%, it may be wise for long-term investors to buy additional shares - even if the stock market mood is negative. The distribution of the neutral example portfolio (50% stocks, 50% bonds and cash) changed to 40% stocks and 60% bonds and cash, due to the stock market fall. By then selling 10% of the portfolio value of bonds and buying stocks instead, the asset allocation comes back into balance and the fifty-fifty ratio is restored.

When the stock market then picks up again, the portfolio value increases more than it would have without switching the 10% from bonds to stocks. After that, if the equity market rises so much that the asset allocation has become 60% stocks and 40% bonds, the balance can be restored to a fifty-fifty ratio again to stay with the plan. With bond buying at the expense of equities, the risk is reduced somewhat again, while the price gain on equities is partly converted into less risky investments. Thus, an investment strategy gives investors a foothold in uncertain times and can help achieve investment goals.

Besides diversification, there are several other commonly used strategies, such as fundamental analysis. This involves assessing return opportunities based on financial-economic characteristics, such as a company's equity, cash flow, earnings per share, dividend payments and macroeconomic expectations.

In addition, investments are often selected on geographical characteristics, or leverage (investing with borrowed money) is used. Quantitative analysis, where large amounts of company data are analysed to find attractive stocks, is another method.

High-income investing is also popular; this involves investing in stocks with relatively high dividend yields. Investors can additionally choose ‘growth style’ stocks, which pay little or no dividend and concerns companies that invest their profits mainly in their own growth, or the opposite style: ‘value’ stocks, which pay relatively high dividends but trade at or below their book value.

Finally, there is the possibility of selecting investments based on non-financial characteristics, such as sustainability, better known as sustainable investing.

A fundamental choice facing every investor is that between a ‘passive’ and an ‘active’ approach. A passive approach uses index trackers (ETFs and index funds). These closely follow the price development of a given index and involve relatively low costs as they require less research.

An active approach means that investments are adjusted regularly, with the aim of achieving a higher return than the average of the broader market (the index). More information on the pros and cons of both approaches can be found on the ‘Active or passive asset management’ page. At InsingerGilissen, we believe in a smart combination of both strategies for optimal results.

In a buy-and-hold strategy, the investor holds a position for a (very) long time. It is a strategy often used by institutional investors such as insurance companies and pension funds, but also by successful 'super investors' such as Warren Buffet. The idea is that if you have done the right fundamental analysis and have a long-term view, you have a promising investment in your portfolio that should be given time to deliver returns. After all, every buy and sell transaction involves risk, and placing few orders keeps transaction costs down. Moreover, it is very difficult, if not impossible, to time the ideal entry and exit moment.

By holding an investment for a very long time, interim price peaks and troughs become less relevant. The idea is that over the long term, investment performance will be less dependent on stock market fluctuations and the price will ultimately reflect the performance of the underlying investment. However, there is always a risk that the analysis on which the investment is based may turn out to be wrong. That is why it is important to revalue from time to time. Even an experienced investor like Warren Buffet sometimes sells an investment at a loss, despite years of patience. Regularly reassessing investments based on new information and changes in the market can help to reduce risk and achieve better results.

When investing in shares, investors can also choose a 'style' of share - shares with a particular characteristic. The two best-known (opposite) styles are value and growth. With value stocks, the investor chooses shares of companies that are not growing as fast, but have an attractive book value compared to their total market value (share price times the number of shares outstanding). These are usually shares in established companies that pay out a relatively high proportion of their profits as dividends. When the economy deteriorates and interest rates fall, value stocks often become popular in the stock market because of the expected dividend and the relative price stability due to the more moderate valuation. Some examples of well-known value stocks: Ahold Delhaize, Unilever and Intel.

Growth stocks are relatively fast-growing companies that pay little or no dividend but reinvest their profits mainly in their own growth. The market capitalisation of all outstanding shares is often higher than the book value: investors are usually willing to pay a premium for the potential future earnings growth. However, growth stocks tend to have a slightly more aggressive risk profile than value stocks. And when interest rates rise, growth stocks are more sensitive than value stocks. Some examples of well-known growth stocks include Tesla, ASML, Meta and Amazon. In the stock market, periods when value stocks outperform growth stocks and vice versa alternate regularly.

A classic investment strategy is to select stocks with relatively high and stable dividend yields. Dividend yield is the ratio of dividends paid to the share price. For example, a share with a price of €100 that pays a dividend of €3 has a dividend yield of 3 divided by 100 = 3%. If a company typically pays out a good proportion of its profits to shareholders, is profitable, has good prospects and a healthy balance sheet, it is not only attractive to investors who need regular results from their investments. In fact, including such dividend-paying stocks in an equity portfolio can also have a stabilising effect during periods of stock market decline when investor sentiment turns negative. This is because dividends can then act as a buffer. If the stock market decline is due to a worsening economic outlook, investors' preference for growth stocks tends to shift towards dividend stocks, as they at least still offer the prospect of a regular income stream. Some examples are DSM-Firmenich, Royal Ahold Delhaize, Unilever, Shell and NN Group.

Dividend stocks offer another advantage precisely because of the dividend. If an investor consistently reinvests the dividends paid in the same stock, there is an interest-on-interest effect. This is the accelerating growth that occurs because the dividend payment is spread over an increasing number of shares. At an average dividend yield of 3.5%, the number of shares doubles every 20 years. And if share price growth is added to the dividend payments, the increase in value over the years can be very significant. Research shows that (reinvested) dividends account for around half of the total return of a stock index over the long term.

Dollar cost averaging, also known as ‘the constant dollar plan’, is the American term for the strategy of steadily buying securities over time. The idea is that you, as an investor, want to avoid getting stuck with a high price at the time of entry. Such a more or less randomly unfavourable purchase price can be largely avoided by dividing the purchase into portions and spreading the purchases over time. Again, an example will make this clearer.

Suppose someone wants to invest 100,000 euros in stock A. At the time, the price of A is 28 euros, but the price fluctuates wildly between 20 and 30 euros. So the example investor divides his purchases into five monthly purchases of €20,000 at 28, 22, 24, 26 and 30 respectively. The result is an average purchase price of 26, which is cheaper than buying the whole amount at the first price. However, there is a downside to this strategy if we assume that the price will always rise over time. Assuming a theoretical, gradually rising price, it is actually more advantageous to deposit the full amount immediately. After all, it pays off right away. But this explanation is obviously a simplification of reality. In reality, prices tend to move erratically.

The investment plan, the overview document for the investment, firstly states the purpose for which the money is being invested, the principles behind it, such as the risk profile, and how long the investment is expected to last. From this follows the appropriate ratio of riskier to less risky investments: the strategic asset allocation. A complete investment plan also specifies which asset classes are appropriate: alternative investments or not, for example? Passive or active investment vehicles? And whether or not 'derivatives' (investment instruments such as options and futures) can be included.

The plan should also indicate the type of investment service chosen: asset management or discretionary portfolio management (where the bank or asset manager makes and executes buy and sell decisions), investment advice (where the bank or advisory service provider provides advice but the decision and placement of buy and sell orders remains with the investor) and execution only, where the bank executes only the orders given by the investor. Finally, it is a good idea to include in the plan the times at which interim reviews and any adjustments to the plan should take place.

In order to draw up an investment plan, you can ask yourself the following questions, among others:

1. What is the purpose of my investments?
2. What risk can and am I willing to take?
3. What is my investment horizon?
4. What conditions* must the investments meet?
5. What type of service do I want (asset management, investment advice, execution only)?

*) Here you can think about: the target return, whether you want to hedge currency risks or not, whether you want to receive income from the investment or not, preference for sustainable investments, preference for investment themes such as hydrogen or AI, regional preferences, and so on.

The next step is to balance the investment portfolio according to the plan (risk profile). After that, the investment plan serves as a benchmark for interim assessments and as a guide in uncertain times. But an investment plan is not set in stone: if a mid-term review shows that the investor's objectives, preferences or circumstances have changed, the investment plan may also need to be adjusted. And possibly the investment portfolio as well.

When you become a client at InsingerGilissen, the first thing we do is get to know you well. We analyse your motives and your family situation and also talk to you about your non-material goals in life. We then offer you the opportunity to have a personal financial or estate plan ('Private Plan') drawn up by an independent external financial or estate planner. If you have one million euros or more invested with us through wealth management or investment advice, the cost of your Private Plan is included in the all-in fee you pay for our investment services. Your Private Plan forms the basis of our investment proposal to you.

As mentioned above, two essential questions to answer when investing are 'what are you investing for' and 'how long do you think the investment will last?’ Many of your investment decisions depend on your answers to these questions. Your investment goals will help determine which risk profile is appropriate. For example, you probably don't want to take on too much risk if you're building up your pension, whereas you might want to take on a bit more risk for a slightly higher expected return in an investment account without a specific goal.

Your investment horizon (expected investment period) will also affect your risk profile. The longer the investment horizon, the more time you can give an investment to recover in the event of a downturn. Good to know: risk and return opportunities usually go hand in hand in investing. The greater the interim fluctuations in value, the higher the expected return. At InsingerGilissen, we determine your risk profile, based on your objectives and investment horizon, as well as your investment knowledge, financial situation, investment experience and risk tolerance.

When it comes to investing your money, you may also be wondering about the extent to which you should consider non-financial factors when selecting investments. For example, do you have ethical objections to companies involved in alcohol, tobacco, fossil fuels, weapons, nuclear power, sex and pornography, or companies that have been discredited for child labour or large-scale deforestation of tropical rainforests? These days it is much easier to express these preferences in your investment portfolio than in the past. Especially if you invest in 'sustainable' mutual funds, which come in a wide range of sustainability grades and specifications.

There is no such thing as 'the best investment strategy' because it is always personal and depends on many specific factors such as personal goals, investment horizon, profile, chosen investments, etc. It also depends on how much time and energy you are willing to invest in managing your investments. After all, if you are serious about it, it can take a lot of time and energy. Fortunately, there are many professionals who can help you. And if you have a million euros or more to invest, we are happy to help you.

At InsingerGilissen Wealth Management, our experts put together an investment portfolio for you that is tailored to your situation, financial goals and preferences among other things, and that is constructed according to our current market vision. Our specialists take care of the daily management of your portfolio. Through targeted purchases and sales, they ensure that your investment portfolio remains tailored to you, your goals and our current market vision.

If you decide to become a client of InsingerGilissen, we will first meet with you to get to know you better. We want to learn as much as possible about you, your family, your plans and your dreams. Then we will discuss how InsingerGilissen can help you achieve your financial goals. We may also be able to help you transfer your wealth to the next generation and to charities close to your heart.

Interested? Make an appointment with us to get acquainted.