Takeaways
- Investing helps you grow your net worth and investment portfolio.
- Your risk appetite factors into the best investment strategy for you.
- Income investing can add income streams to your day job, boosting overall earnings.
- Investment strategies can evolve depending on your financial situation.
- Consider your portfolio allocation when deciding on your investment strategy.
What is Investing?
Investing is the process of using capital to purchase assets for income or profit [1]. Hopefully, the assets distribute returns in the form of income payments, or the value of assets increases, and you can sell the investment for capital gains. In personal finance, investing typically means purchasing stocks, bonds, commodities, or real estate. Profits can come from capital gains and appreciation or when your asset produces income (or cash flow) over time. For example, many stocks pay a dividend to the owner of that stock.
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What is an Investment Strategy?
An investment strategy is a plan that helps you select investments for your portfolio to meet your financial goals. Your investment strategy determines what types of investments to purchase, maintains the right level of risk, and produces the anticipated level of returns for your stage of investing while achieving your financial goals.
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Some common questions to help you choose your investment strategy include: What are your financial goals? Where are you on your investment journey? What is your risk appetite? What types of investments are you comfortable making? How much capital can you set aside for investing?
Considerations to Determine Your Investment Strategy
Before deciding which investing strategy is right for you, determine your investment goals. Your investment goals should align with your overall financial plan and consider factors like your investment time horizon, risk profile, and whether you want to manage your investments, hire a financial advisor, or use a robo-advisor.
Time Horizon: Your time horizon may dictate where you invest. For example, if you focus on saving for retirement, which is 30 years in the future, you can focus on a strategy that sets the foundation to exit those positions in 30 years. However, if you are saving for a down payment on your first house, you might want to invest in certificates of deposits or money market funds to use that capital in the next 1 to 2 years.
Risk Appetite: In investing, risk and reward are considered inverses. Adding risk to your portfolio, such as investing in startup companies, may also inject high returns to offset that risk. However, by investing in low-yielding stocks, such as companies that have been around for decades and offer a steady dividend payment, you accept a lower return for the safety of your investment.
Financial Advisor, Robo-Advisor, or DYI: Managing a portfolio of investments can feel like a full-time job. On one end of the spectrum, you can hire a financial advisor to balance your time horizon, risk, and returns. Alternatively, you could use robo-advisors, or if you like having complete control, you can manage all your investments yourself.
10 Investment Strategies for Beginners
No matter where you start, choosing an investment strategy that works for your personal situation is critical. Here are ten investment strategies used by investors to boost their net worth and build their portfolios to support their money goals:
1. Buy And Hold
The buy-and-hold investing strategy is often the most intuitive investment strategy. Essentially, no matter what investment you purchase, you want to buy and then hold the asset for a long time.
A core element of this investment strategy is purchasing investments you expect to perform well over a long-time horizon. This could mean buying more well-established businesses or startups you think will do well over the next 10, 20, or 30 years.
The best part of this investing strategy is that it lets you sleep well at night. It is the investment strategy most directly aligned with a “set it and forget it” approach. The buy-and-hold strategy has been adopted by some of the most elite investment firms on Wall Street. One of its benefits is that during market turbulence, in bull and bear markets, you can still stick to your investment strategy of buying assets that align with your overall financial goals.
2. Index Funds
Investing in individual stocks or bonds can be one approach to investing. However, investors can also invest in indexes, mutual funds, or exchange-traded funds (ETFs), which inject their portfolio with exposure to a broad set of investments.
Diversification is a benefit of index investing. Index investing provides an investor’s portfolio exposure to a particular industry, sector, or geographic region that is difficult to recapitulate from a cost standpoint by buying individual stocks.
3. Income Investing
The income investing strategy produces a steady income stream. Many investors are attracted to this investment strategy because they want to generate passive income to help them cover living expenses, invest in more assets, or add cash flows to their budget.
The income investing strategy is often used for retirement planning, but you can start earning income from investing at any time. In addition to producing income, your investments will appreciate over time and generate capital gains.
Here are some investments that produce income streams:
- Dividend-paying stocks
- Dividend-paying ETFs
- Certificate of Deposits (CDs)
- Real Estate Investment Trusts (REITS)
- Bonds
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4. Dollar-Cost Averaging
Are you concerned about trying to time the market? If so, the dollar-cost averaging investment strategy could alleviate this investing anxiety. Dollar-cost averaging is an investment strategy that advocates consistently contributing a certain amount of cash per period to capture the market lows and highs, eliminating the need to time the market.
For example, this could mean saving $100 per paycheck to invest in your retirement accounts. This consistent stream of stock purchases, Target Date Funds, ETFs, or mutual funds would allow you to capture the average market price over time. When to start investing is never a question with the dollar-cost averaging method because investing continuously is the backbone of this strategy.
To balance risk and reward the dollar-cost-averaging investment strategy can also be combined with other investing approaches.
5. Active Investing
Active investors buy and sell more than any other investment strategy. That is because active investors try to capture short-term gains based on market or stock momentum, short-term catalysts, or macroeconomic events.
Stock momentum could come ahead or after company-specific news and active investors try to ride the wave up. Short-term catalysts or event-driven trades are positions ahead of company-specific updates, such as an acquisition, divestiture, new product launch, or market-moving event. Macroeconomic events could affect specific companies more acutely, such as a new regulation banning travel, which could adversely affect travel and entertainment companies.
6. Growth Investing
Growth investors focus on a company’s ability to grow revenue, profits, or net income. Investors pay a premium for stock that can consistently increase quarter after quarter and year after year. Growth investors typically look for companies on the brink of penetrating a large addressable marketplace.
Technology companies typically fall into this category because they can quickly scale and capture new markets. Consider the shift from paying for day-to-day transactions with cash to mobile applications to pay or transfer cash (PayPal, Venmo, or Square).
Growth investors, as the name suggests, are always looking at how the company can grow faster – expanding into new demographics, and geographies, or adding on complementary business verticals. Investing in growth companies can be risky and thus investors typically require a higher return for these investments because there is no guarantee that future growth will take place. Growth investors look for growth companies in a variety of sectors and across different market capitalizations.
7. Value Investing
If you like finding deals, then value investing might be for you. Value investing is the strategy of finding undervalued stocks that investors have either written off, abandoned or have yet to see materialize long-term prospects. Popularized by Benjamin Graham’s seminal books, The Intelligent Investor and Security Analysis, and later evangelized by billionaire Warren Buffet, value investing is the concept that investors can realize tremendous gains by buying stocks trading below their intrinsic value.
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Here's an example: A traditional book publishing company has been struggling for the last decade to keep up with the shift from print publishing to digitally based book consumption, such as eBooks and audiobook offerings. The company has just hired a new CEO, who specializes in turnarounds and has laid out a plan to completely shift the company’s business model to focus on digital. Few investors even follow this company. A value-based investor could see this as an investment where there is a fundamental mismatch between the current stock price and where the company is headed with new management. This is a buy for a value investor.
8. Socially Responsible Investing
Socially responsible investing is an investment strategy that combines investing for social and environmental good while considering financial returns. Investors can invest in individual companies, mutual funds, or ETFs with a mandate to invest in socially responsible companies specifically dedicated to addressing issues such as Environmental, Social, and Corporate Governance (ESG).
Socially responsible investing has gained popularity in recent years. At the core of socially responsible investing is aligning individual beliefs with where to invest your capital. For example, some portfolios might actively avoid "sin" stocks from alcohol, tobacco, or gun manufacturing companies. Others might avoid investing in oil drilling in favor of electric car companies.
9. Interest-Based Investing
The inertia of starting to invest can be one of the most difficult challenges for new investors to overcome. For interest-based investors, knowing where to start is not the problem because you invest in companies whose products you already use and love.
If you love sports, for example, you could invest in publicly traded companies like Nike, Under Armor, or Lululemon. If you swear by Tide laundry detergent, investing in Proctor & Gamble could make sense for your portfolio.
Investors can use the interest-based method of investing to get started and then combine the strategy with the other investment strategies listed above to construct a portfolio they love with the right mix of risk and reward.
10. Passive Investing
Passive investing is an investment strategy that aims to maximize investment returns while minimizing investment fees. Passive investing chooses to engage in less frequent trading of stocks but instead adopts a more buy-and-hold long-term oriented investing strategy.
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A passive investing strategy is used in index investing, where investors invest in an index constructed to represent a particular element of the market or mirror a specific index, such as the S&P 500 Index. Other index investing aims to mirror segments of the economy, such as large capitalization companies, while others track leading stock indexes like the Dow Jones Industrial Average or S&P 500.
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Exchange-traded funds, or ETFs, can also be securities for passive investing. Investors can invest in an ETF, which is an investment security that represents an investment in a basket of securities. ETFs can also invest in and track a sector, industry, or index. ETFs are bought and sold like stocks and makes passive investing accessible to many new investors.
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Smart Summary
Investing strategies can be divorced from the level of experience. Your goal should be to choose an investment strategy that aligns with your financial position and the portfolio you want to create. Your portfolio construction should adhere to your short- and long-term financial goals. Investing in stocks is a great way to start the habit of investing.
[1] Merriam-Webster. Investing. Last Accessed September 8, 2023.
