11 Effective Investment Strategies for the Australian Stock Market
By Jason McIntosh | Published 4 May 2023
Success in the stock market largely depends on your investment strategies. But with so many options available, it can be difficult to know where to begin.
A good investment strategy is like a roadmap for achieving your financial goals. It also provides a structured approach to investing. Rather than relying on guesswork or emotions, investment strategies provide a framework for making investment decisions.
In this article, we will explore 11 effective investment strategies for the Australian stock market, including value, growth, momentum, contrarian, income, trend following, quality investing, index investing, options trading, FX trading, and diversification.
By following a proven strategy, investors can increase their chances of achieving their financial goals and minimising their risks.
Okay, let’s get into it…
Value investing involves buying stocks that are trading at a discount to their intrinsic value. The underlying principle is that the market sometimes undervalues good companies, and their true worth will eventually be recognized. This strategy requires a thorough analysis of a company’s financial statements, including its assets, liabilities, and earnings.
For example, if a company has a solid financial position and is trading at a discount to its intrinsic value, a value investor may buy its stock and hold it until the market recognizes its true worth.
Warren Buffett is probably the world’s best known value investor.
Growth investing involves buying stocks of companies that have a high potential for growth in the future. The underlying principle is that these companies will generate higher earnings and increase their market share over time. This strategy requires a strong understanding of a company’s business model, its products, and its growth potential.
For example, if a company has a unique product or service and is growing rapidly, a growth investor may buy its stock and hold it for the long term.
Technology companies are often some of the fastest growing companies. This helps explain the Nasdaq’s tendency to outperform over the last several decades.
Momentum investing involves buying stocks that have performed well in the recent past and holding them for further gains. The underlying principle is that stocks that have performed well in the past are likely to continue to perform well in the future. This strategy is based on the belief that stock prices tend to move in trends, and it can be an effective way to capitalise on rising share prices.
For example, if a mining stock breaks to a new high after a period of quiet trading, a momentum investor may buy on the potential of further gains. Strong momentum often leads to further movement in the same direction.
Contrarian investing is a strategy that involves buying stocks that are currently out-of-favour with investors. The general belief is that these stocks are potentially undervalued and may perform well in the future. This strategy requires a contrarian mindset, as investors must be willing to go against the market consensus.
For example, if the market is pessimistic about a particular sector or company, a contrarian investor may see an opportunity to buy undervalued stocks and hold them until they are recognised by the market.
A key risk with this type of investing is that bad situation gets worse. Contrarian investors sometimes use momentum strategies to help identify turning points, and reduce the risk of buying early.
Income investing involves buying stocks that pay high dividends or other forms of income, such as interest or rent. The aim is to generate a steady income stream from your investments. This strategy is suitable for investors who are looking for a regular income from their investments.
For example, if a company has a history of paying high dividends and has a stable financial position, an income investor may buy its stock and hold it for the long term to generate a steady income stream.
Banks and property trust are popular plays for many income orientated investors.
Trend following is a popular investment strategy that has been used successfully by many investors over the years. The basic principle of trend following is that the market moves in trends, and by identifying and following those trends, investors can achieve significant gains while minimising losses. This is achieved by buying and selling assets based on the direction of the trend.
For example, if the market is in an upward trend, a trend follower may buy stocks and hold them until the trend reverses. The goal is to capture as much of the trend as possible while avoiding significant losses when the trend reverses.
Trend following strategies have a long and successful history, and are used by many successful investors and hedge funds around the world. One of the most famous trend followers is Richard Dennis, who trained a group of novice traders in the 1980s. They went on to generate significant profits, demonstrating the power and effectiveness of trend following.
Quality investing is a strategy that focuses on companies with high-quality business models, sustainable competitive advantages, and solid financial fundamentals.
The goal is to identify companies with a durable competitive advantage that will continue to generate strong earnings and cash flows over the long term. These companies typically have a strong balance sheet, stable cash flows, and a history of consistent dividend payments.
Quality companies include large global brands like Coca-Cola, McDonalds, Microsoft. Locally, the largest ASX companies would typically qualify for this category.
Index investing is a passive investment strategy where an investor buys a portfolio of stocks that tracks a particular index, such as the S&P/ASX 200. This strategy aims to achieve the same returns as the index it tracks.
This strategy is popular among investors who want to diversify their portfolio and avoid the risk associated with individual stock picking. However, investors should keep in mind that they will not beat the index by using this strategy, as the returns will be similar to those of the index.
Index investing is often a good option for people that want exposure to the stock market, but don’t want to actively manage their own portfolio.
Foreign Exchange (FX) and Options Investing
FX and options investing are complex specialty areas that require a high level of skill and expertise. Investing or trading in FX involves buying and selling currencies in the foreign exchange market, while options investing involves buying and selling options contracts.
Both strategies are highly risky and require a deep understanding of the market and the instruments being traded. It is important to note that while some promoters make FX and options investing seem easy, the reality is that successful FX and options traders are often highly skilled professionals.
Diversification isn’t a specific investment strategy, but rather a principle that underlies many successful investment strategies. It involves spreading your investments across different asset classes, industries, and regions to reduce the risk of a single investment having a significant adverse impact on your portfolio.
By diversifying your portfolio, you can reduce your overall risk and potentially increase your returns.
Summing it all up
Investing in the Australian stock market can be a rewarding experience for those who are willing to take the time to understand the different investment strategies available. Whether you’re a novice or an experienced investor, these 11 effective investment strategies can help achieve your financial goals.
Some of the best investors will use a combination of strategies. For example, you could pair a value or growth strategy with a trend following strategy. The aim could be to maximise gains and have a plan for when to sell.
Momentum strategies can also be used to identify potential investment opportunities. An investor can then apply other strategies to zero in on the highest potential stocks.
If you’d like to know more about trend following, and if you want to learn about the type of entry and exits rules many professionals use, then I have a series of videos and articles that could help.
Jason McIntosh | Founder, Motion Trader
Jason’s professional trading career began over 3 decades ago. He’s a founder of two stock advisor firms, a listed funds management business, and has helped thousands of investors navigate the stock market. Click here to read Jason’s incredible story of, at age 20, sitting alongside some of the world’s greatest traders (and the life changing experience that came with that).
I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney.
Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.