Bonds or shares: more to do with an investor's strategy than market scenario

Investors have a range of investing options, including commodities, real estate, bonds, shares etc. Most of the investors don’t have sufficient resources to invest in their desired asset class.

Consider Amy wants to buy a beachside apartment, but she only makes $60k annually while the apartment costs $600k. She needs to save for deposit money first, then a mortgage could be possible. Moreover, she requires to save for deposit money.

Likewise, an investment would require you to save seed money to kickstart your investing. Planning for your objectives is necessary and implementing your plans is even more critical to achieving desired results.

Strategy plays a vital role in shaping your investment decisions as well as results. The best investment strategy may not be the one that delivers highest returns, but the one that works out in multiple scenarios at a given risk tolerance.

Choosing a strategy depends upon on various things like your investment objectives, desired return, time horizon, and risk appetite. Based on these aspects, one can have an idea on his/her suitable investment strategy.

What’s most important in each of the investment strategies is diversification through various asset classes. Diversification in a portfolio is very crucial to manage risk efficiently, and investors are offered with a range of asset classes to diversify the asset base.

Small cap investing is a strategy where investors concentrate on small companies having huge potential to grow over a period of time in a bid to become a large cap company. In this strategy, the investor usually looks for names that are new in an industry having the potential to capture a sufficient market share in the industry to deliver shareholder value.

Growth investing strategy refers to an investing strategy wherein investor pursue companies that are delivering above average growth due to respective products, industry and customer value proposition.

As a result of above average growth attributes, growth companies often look expensive through traditional metrics like P/E ratio. It is a relatively risky investment strategy that may involve small companies with unproven business models.

Value investing was popularised by the Warren Buffet. This strategy usually focuses on tracing value from the available investment options. It seeks to acquire companies at a price less than the intrinsic value of the business.

Income investing strategy seeks to invest in businesses that return income mainly through dividends. In this strategy, an investor seeks to gain from the cash paid by the business rather than growth in value of the stock that would increase the portfolio value with no growth in terms of cash.

Environmental investing is becoming popular among investors as the environment continues to face detrimental consequences globally in the face of global warming and carbon emissions. In this strategy, the investors seek to invest in companies with minimal, no carbon footprint or the ones that are building technologies to reduce carbon footprint.

Responsible investing strategy seeks to invest in accordance with your principle. Consider you don’t endorse public weaponisation and licensing then you may want to exclude companies that are engaged in allied activities from your portfolio. Likewise, if you are vegetarian you may want to exclude companies engaged in meat production or allied services from your portfolio. Moreover, responsible investing could be tailored according to your principles.

After considering an investment strategy, an investor usually looks for the available investment options. Most of the times an investor is likely to diversify his/her portfolio through equity and debt.

Equity Investments

Investors acquire shares/stocks in a company, which means a stake in a company in lieu of payment, depending upon the share price and a number of shares. An equity investment rises or falls in its value that translates to capital gain or loss. It may also generate cash in the form of dividends that are announced by the companies.

Investors consider equity investment to gain from the potential rise in value or price of the holdings or dividends. And, investing in a range of companies enables an investor to benefit from the diversification.

Risks of equity investments

Although there could be numerous risks associated with equity investments that could be idiosyncratic as well, some of the headline risks in equity investments are below:

Economic risk: This risk is the most common risk in equity investments. An economy goes through a various period, including a recession, recovery, boom, contraction etc. Also, there are exogenous shocks to the economy, just like COVID-19 or a terrorist attack.

Inflationary risks: A higher rate of inflation depletes the purchasing power of returns as well as your money, and it is like a tax on everyone in a country that could destroy the value created overtime through savings or investments.

Liquidity risk: A company is susceptible to a lot of and unable to generate sufficient cash flows to services its liabilities is one of the risks too. Liquidity risks mean that the company is unable to meet its obligations, which may trigger bankruptcy in some cases.

Fixed Income Investments

Fixed Income investments generally pay a rate of interest that is fixed. Bonds are one of the fixed income securities, and Government bonds are one of the primary bonds in fixed income markets.

It provides relatively stable returns compared to other investment asset classes. During retirement, fixed income investing is considered to be a retirement living investment strategy due to its safer returns.

Risks of fixed income investments

Even though fixed income is a conservative investment asset class, it does not mean that there are not any risks in fixed income investing. While diversification enables an investor to spread the risk across bonds based on issuers, maturity, grade, or tax treatment.

Credit Risk: It refers to the risk of default by the issuer of the bond, and the default could be of interest payments as well as principal repayments. Credit rating agencies measure the creditworthiness of the issuer and assign a credit rating to debt issued by issuers.

Inflation Risk: Similar to equity investing, inflation risk applies everywhere, even in your savings account. In fixed income assets, the Governments generally issue an inflation protected bond, in which the principal amount is adjusted as per the level of Consumer Price Index.

Prepayment risk: Some fixed income assets have an option whereby an issuer could prepay the principal amount of the bond before the maturity date, which would change the dates of your expected cash flows.

Interest rate risk: Just like equites, fixed income assets are traded in the secondary market. In the secondary markets, traders have to consider a range of factors prior to arriving at an execution price in a trade. One of those factors is interest rates, if interest rise, the bond prices fall while when the interest rates fall, the bond prices rise.