The two main investment strategies are Active and Passive.
Active management is the predominant model for investment strategy today. Active managers try to pick attractive stocks, bonds or mutual funds and try to time when to move into or out of markets or market sectors. They will place leveraged bets on the future direction of securities and markets with options, futures, and other derivatives. Their objective is to make a profit and to do better than they would have done if they simply accepted average market returns.
In pursuing their objectives, active managers search out information they believe to be valuable and often develop complex or proprietary selection and trading systems. Active management encompasses hundreds of methods and includes fundamental analysis, technical analysis, and macroeconomic analysis, all having in common an attempt to determine profitable future investment trends.
Passive investment management makes no attempt to distinguish attractive from unattractive securities, or forecast securities prices, or time markets and market sectors. Passive managers invest in broad sectors of the market, called asset classes or indices. Like active investors, they want to make a profit but they are prepared to accept the average returns various asset classes produce.
Passive investors make little or no use of the information active investors seek out. Instead, they allocate assets based upon long-term historical data delineating probable asset class risks and returns; they diversify widely within and across asset classes and maintain allocations long-term through periodic re-balancing of asset classes.
Active management tends to be more expensive with costs such as trading costs and a higher management fee. Generally, active managers do not do better in bear markets or allow investors to avoid losses. Research has clearly established that portfolio performance differences between different professional money managers are due predominantly to the asset classes they choose and that it is markets and not managers who produce returns.
Passive managers believe that all markets are fully efficient and that long term average market returns are as good as it gets. Therefore, they choose not to spend cash on expensive research and trading.