The Active Strategies for Financial Investments - Essay Example

 Appropriate or proper stock selection involves the buying of undervalued stocks. The investor must be aware of any existing public information related to the stocks he/she is going to buy to be able to evaluate fairly well the best possible stocks that are being offered which will eventually yield the best possible growth and return.

This type of investment technique keeps the portfolio streamlined and more manageable because the investor is well-informed about the stocks’ standing. Market timing strategy leads any potential investor to purchase stocks when the prices are low and to sell them when they reach their maximum peak values at a given time. This entails guessing the ups and downs of the money market that is usually dependent on various issues that affect marketable stocks. Bond swapping is an active investment strategy that requires an investor to make a forecast as to when to sell long-term bonds and when to buy short-term bonds.

The capital gains on bonds are based on the changes involved in interest rates, which normally fluctuates from time to time. Last but not least active strategy for financial investment is the ladder approach where investors are encouraged or advised to invest in mixed or various types of investments that have different maturity dates and varying levels of risks. This particular active strategy is designed to provide the investor with a more regular and fixed income that has lower risks (Norton, 2008a).

The second type of investment strategy is the passive investment strategies. This type of investment strategy involves the following investment techniques: balance mutual fund; index portfolio, dollar-cost averaging, buy and hold; and dividends reinvestment plan. The balanced mutual fund is a diverse combination of investments offering various maturity dates along with different risk intensities. This kind of investment strategy helps to make any investment portfolio more stable since the levels of risks vary and the returns augment losses if any.

Next passive strategy is the index portfolio intended to copy a main index. Similar shares with the same proportion as the main index are bought with the primary aim of duplicating its performance and not out-performing it. This makes returns more predictable and is often utilized when investing in inequities. The dollar-cost averaging is another form of passive investment strategy where investments are purchased at standard periodic intervals without considering the fluctuation of market prices.

Hence, if the price movement is downhill the average price for the investment is usually greater than the current market price. But if the price trend is uphill then the average cost is less than the market price. Buy and hold is another type of passive investment method which aims to provide the best possible return for a particular risk level. This method normally involves bonds and stocks that are held for long periods of time or until their respective maturity dates. The dividends reinvestment plan strategy is a type of passive investment technique where the dividends paid out by a trading company is used to purchase additional stock shares.  The tax due is normally paid by the investor and the purchases are done by a trader.  This type of investment tactic aids in the acquisition of more stocks a particular investor feels is more reliable since he/she has purchased them in the past (Norton, 2008b).

The modern portfolio theory considers investors to be unenthusiastic about any form of risks; meaning that investors would want to have an investment portfolio that would give a better return on their investments, eliminating high or low risks as much as possible. The said theory not only gives options on ways to invest but gives comprehensive insights on why and how it is essential to have a well-diversified financial investment portfolio.  It likewise gives alternatives on the different combinations of investments available in the market together with various maturities and levels of risks, which offer better income generation and return of investments for the prudent investor (Economy Watch, n.d.).