An investment strategy is a structured set of rules guiding an investor's selection of a portfolio, balancing individual profit objectives with the inherent trade-off between risk and potential return. It considers crucial factors like the investment time horizon, recommending a minimum of five years for shares, and stresses the importance of an emergency fund (6-12 months of expenses) before committing to riskier assets, while also accounting for the impact of inflation.
Key approaches include "passive investing," such as buy and hold (long-term ownership) or indexing (investing in a market index), which aim to minimize costs by not attempting to time the market. In contrast, "active strategies," like momentum trading, seek to outperform benchmarks based on perceived skill or recent performance trends. Investors also employ more complex methods like a long short strategy, simultaneously buying and selling different securities, and choose between the perceived safety of developed markets or the higher growth potential but increased risk of emerging markets.