Before choosing an investment strategy that suits you, it is important to have “done your homework” – to have clearly defined your goals and risk profile, and to have a financial plan in place to ensure funding for investments without disrupting your regular lifestyle. Another part of this “homework” includes securing your financial stability, which involves establishing and maintaining an emergency fund and repaying debts with the highest interest rates.

Broadly speaking, an investment strategy describes how you invest. Here are some key aspects to understand before deciding what approach is most suitable for you:

 

1. Investment Advice

Investment planning requires a comprehensive approach and specialized knowledge. Therefore, seeking help from a professional in the field can be a good option. Regarding investment advice, keep in mind that licensed investment consultants can assist with the purchase or sale of specific financial instruments. These consultants may work for investment intermediaries or management companies, or be tied agents with the appropriate rights.

 

2. Traders and investors

Many people have heard these terms, but what do they really mean, and what is the difference between them?

Traders focus on short-term market movements, aiming to profit from small but quick changes in asset prices. For example, if a trader observes increased demand for technology stocks, they may buy such shares in the morning and sell them later the same day or within a few days or weeks, if the price has risen.

Traders take a more aggressive approach. Their goal is to maximize short-term profits, often using technical analysis, which is based on historical price movements and chart patterns.

Traders may also engage in speculative trades – even if they do not see strong long-term prospects for a given asset, they might still try to capitalize on a potential short-term price movement. To do so, they monitor not only news that could influence market trends but also even rumors.

Typically, traders take on higher levels of risk due to the market's volatility and the frequency of their trades. They employ various risk management strategies to protect themselves from potential losses – for example, if their price movement forecasts prove incorrect. Such strategies include the use of stop-loss orders and leverage.

Leverage is a method where traders use borrowed funds to increase the potential return on a trade. This can significantly amplify both gains and losses, as losses may also be multiplied. When using leverage, investors deposit a small percentage of the position’s value as margin, allowing them to control a large amount of financial assets with relatively little personal capital. Using leverage requires sound market judgment and strict risk control, as mistakes can quickly lead to significant losses. Investors must carefully consider their strategy and use tools like stop-loss orders to limit the potential negative effects of trading with leverage.

Important note: Traders assume considerable risk, and their investment strategies are often not suitable for people who lack sufficient knowledge of financial markets and experience in trading financial instruments.

Investors, on the other hand, typically follow a long-term strategy, based on the prospects of a specific company, sector, or industry. They view financial instruments as a way to grow their investment in the medium to long term, betting on sustainability and future stability. The main tool for assessing an asset’s potential is fundamental analysis, which includes examining financial statements, forecasting revenue and expense growth, and analysing industry trends and economic conditions.

Investors accept short-term market fluctuations as part of the long-term process of building their investment strategies and refrain from frequent buying or selling, unless there are fundamental changes in market conditions. They rely on diversification to reduce risk within their portfolios.

 

3. Active Investing

Active investing is an approach in which investors aim to outperform a market index or benchmark by taking advantage of market opportunities. It is most often used by professionals such as portfolio managers. Key benefits of this strategy include:

• Potential for higher returns
  The main advantage of active investing is the pursuit of returns that exceed the market index. Professional portfolio managers select assets and apply strategies they believe will deliver better results than standard benchmarks.
• Flexibility and adaptability
  Active investing allows portfolio managers to quickly adapt strategies to changing market conditions. If new opportunities arise or the market becomes volatile, they can redirect investments toward more promising sectors or restructure the portfolio to minimize risk. This flexibility enables active managers to respond quickly to economic news, policy changes, or new financial reports.
• Tailored strategy aligned with investment goals
  Active investing enables personalized portfolio management. The strategy can be tailored to the investor’s specific goals, time horizon, and risk tolerance. For example, an active manager may choose riskier stocks for a more aggressive portfolio or invest in more stable assets for investors seeking security and steady income.
• Protection potential during market downturns
  Active managers can use strategies to reduce losses during unfavorable market conditions. They may exit certain positions if they believe an asset will decrease in value or invest in assets that tend to remain stable during economic slowdowns. This adaptability helps protect investors during market downturns and preserve portfolio value.

 

4. Passive Investing

Passive investing is a strategy that relies on holding assets long term, aiming for stable and predictable returns with minimal trading. Key advantages include:

• Lower management costs
  One of the most important benefits of passive investing is its low cost. Since it involves infrequent trading and no need for highly specialised professionals, transaction and management fees are significantly lower than in active investing. Exchange-traded funds (ETFs) that track well-known indices typically have minimal management fees, making them accessible and efficient for a wide range of investors.
• Lower risk of human error
  As passive investing does not involve constant trading or decision-making, the risk of human mistakes is significantly reduced.
• Stable and predictable expected returns
  Passive investing offers the advantage of stability, with portfolio returns typically mirroring those of the tracked index or market. Historical data show that indices such as the S&P 500, for example, often deliver average annual returns that exceed those of actively managed funds.

Important note: The S&P 500, which includes 500 of the largest companies in the U.S., reflects the overall state of the American stock market and serves as a benchmark for market returns. Other notable indices include:

• Euro Stoxx 50 – covers 50 of the largest companies in the eurozone and represents European market performance.
• FTSE 100 – a UK index of the 100 largest companies listed on the London Stock Exchange.
• DAX – a German index tracking the 40 largest publicly traded companies on the Frankfurt Stock Exchange.
• SOFIX – the main index of the Bulgarian Stock Exchange (BSE), including the 15 most liquid and representative companies on the market, serving as a barometer of the Bulgarian capital market.
• Diversification and lower dependence on individual assets
  Many passive strategies, such as those employed by exchange-traded funds (ETFs) or index mutual funds, provide natural diversification by including numerous companies from various sectors. This wide exposure to different assets reduces the risk associated with individual companies or industries.
• Suitable for long-term goals
  Passive investing is based on the long-term growth potential of the market. For investors seeking to accumulate capital over time – for retirement or children’s education, for example – this approach is optimal as it follows market trends and takes advantage of time to smooth out volatility.

What to choose – active or passive investing – depends on your individual mindset and preferences.
Retail investors have a wide range of options. They can invest in mutual funds that are actively managed or direct their money toward index mutual funds or ETFs.

 

5. Systematic Investing

Systematic investing is a popular passive investment strategy based on the principle of cost averaging (known as dollar-cost averaging, DCA). This means investing a fixed amount at regular intervals into selected assets. Over a long period, you end up buying assets at various prices – high, low, and average. During market downturns, you are able to invest in more assets due to lower prices, and vice versa. As a result, you are expected to achieve a very favorable average cost and overall positive returns.

For example, if you acquire 100 units of an asset at EUR 50 per unit, and the price then drops to EUR 40, you can purchase another 100 units. This brings your average acquisition price down to EUR 45. When the asset reaches EUR 48, your total investment shows a positive return.

A major benefit of this strategy is that it saves you from stress and emotional decision-making, as you will not constantly worry whether you are buying at the right moment or missing a big opportunity.

Retail investors have access to a wide variety of so-called systematic investment plans, offered by financial firms. These are based specifically on the strategy of systematic investing, usually involving equal monthly contributions over a set period. By default, investment amounts are automatically transferred from your bank account, which adds a disciplinary effect to the management of personal finances.

When trading financial instruments, a so-called “contract for difference (CFD)” may also be concluded. This is a more complex derivative product (derivative instrument, derivative), often based on the core assets discussed in article “Types of investments”. However, CFDs are not suitable for inexperienced investors. In such a contract, the buyer does not actually own the underlying asset (stocks, commodities, gold, currencies, crypto-assets, etc.) but agrees with the seller to settle the difference between the asset’s current and future price.

When entering a long position, the buyer expects the price to rise, and if it does, the buyer profits at the seller’s expense. In a short position, the logic is reversed – the buyer expects the price to fall. If the buyer’s expectations are incorrect, the seller profits instead. Since all of this occurs on the over-the-counter (OTC) market, the buyer does not have control over or access to the underlying asset.

Important note: A significant number of inexperienced investors lose substantial portions of their funds when trading complex instruments.

You can choose to invest independently – placing buy and sell orders for financial instruments – by opening an investment or trading account via a platform provided by an investment intermediary (e.g. mobile app or website). In such cases, besides the high risk you take on, there are various considerations regarding tax reporting and declaring ownership of the assets and realised returns. Treatment may vary depending on whether you operate as a business (i.e. based on the number and volume of transactions), whether you trade on a regulated market, and the exact type of financial instruments involved. For this reason, it is advisable to conduct independent research or consult an expert for each specific case.

 

Useful links:

Bulgarian Stock Exchange

Financial Supervision Commission

Investment activity

Lists of supervised entities

Qualified investment consultants

Investment Firms

Management companies