“In investing, what is comfortable is rarely profitable.” These words of the American entrepreneur and investor Robert Arnott probably best reflect that investing is not an easy task – it takes knowledge, patience and risk taking.
And that’s after you define your investment goals, because the reasons for investing can be different – whether you’re saving for retirement, buying a new house, a vacation home, or for your children’s education.
There are many different ways to invest, depending on how willing you are to take risks, how you like to invest, what your long-term financial goals are, and how much money you have.
After you have decided that you want to increase your personal wealth by investing in stocks, you need preparation about what ways to invest in these assets exist, that is, what are the known investment strategies in this context.
An investment strategy is a set of rules that help you decide what to do with your money. Investing plans can be changed. If you choose one and find that it doesn’t fit your risk level or schedule, you can change it.
But there are costs to changing how you invest. Every time you buy or sell a security, especially if you do it quickly in an account that is not protected from taxes, you may have a taxable event. You may also realize that your investments are riskier than you’d like after their value has gone down.
Risk isn’t always a bad thing
However, in investing, risk isn’t always a bad thing. Most of the time, investments with more risk pay off with higher returns. Even though investments with less risk are more likely to keep their value, they also don’t have as much potential for growth.
Two things determine how much risk you are willing to take. First, this is usually based on your age, income, and how long you have until you retire, among other things. Younger investors have more time to make up for losses, so it’s often suggested that they take on more risk than older investors.
Learn the basics of investing to cut down on the risk of your investments. Learn how to read stock charts and start by reading the financial statements of some of your favorite companies. Stay up to date on what’s going on in the industries you want to invest in. It’s smart to know the basics of what you’re getting into so you don’t invest blindly.
Common investing strategies
Here, we look at several common ways to invest that work for most people. By taking the time to learn about what makes each one unique, you will be better able to choose the one that will work best for you in the long run without having to pay to change course.
Buy and hold
Buy and hold is the easiest way to invest for the long term. Individual stocks are just bought and kept for as long as you want. How well a buy-and-hold portfolio does depends, of course, on the companies in it. Even though “buy and hold” is the simplest way to invest, it can work better than you might think. Investors often work against themselves and sell their investments at the wrong time. With this method, that problem is taken out of the equation.
There are two big ways to make a buy-and-hold portfolio much more likely to do well. First, try to find stocks that are likely to last a long time. A good choice is to buy stocks that have a strong brand and are not likely to be changed. Second, don’t take too many positions. So, if you make some bad choices, they won’t hurt your portfolio too much. And the stocks that do very well will make up a bigger part of your portfolio as they grow.
Value investing
The value investing strategy involves putting money into a company based on how much it is worth to the company itself. The stock market undervalues such companies. The idea behind investing in these companies is that when the market goes through a correction, the value of these undervalued companies will go up, and the price will shoot up. When investors sell, they will make a lot of money.
Value investing is best for people who want to keep their investments for a long time. If you invest in value companies, it could take years (or even longer) for their businesses to grow big enough to make you money. Value investing looks at the big picture and often tries to invest with a mind for slow, steady growth.
Warren Buffett, an iconic investor, made a fortune by putting his money into companies with steady profits and low prices.
Growth investing
Instead of looking for cheap deals, growth investors look for investments that have a high chance of making money in the future. But growth investing is not the same as speculative investing in a risky way. Instead, it involves figuring out how healthy a stock is right now and how much it could grow.
The best thing about growth investment strategies is that they give you access to the sectors and industries that are growing the fastest. This means you are putting your money into companies that have the best chance of giving you a high return each year. Investing in growth stocks is also fun, and you get to learn about the companies that are innovating and building the future. But you should be careful when investing in growth.
One bad thing about growth investing is that you don’t get dividends. When a business is growing, it often needs money to keep growing. This leaves very little money for dividend payments. Also, when earnings grow faster, the stock’s value goes up, which most investors see as a higher risk.
Momentum investing
Momentum investing is kind of like growth investing, but it looks at the stock’s price fluctuations instead of its earnings or sales growth. There is evidence that the best-performing stocks in a given time period are likely to do even better in the next time period.
So, only price action is used to decide whether to buy or sell, though it helps to avoid small and illiquid companies. A very simple momentum strategy would be to buy 10 to 20 stocks that are doing well and hold on to them for a year. At this point, all of the stock is sold, and the process starts all over again. In more complicated versions of the strategy, money is constantly moved into stocks with the most momentum every month or quarter.
Technical analysts are very important to momentum investors. They only trade based on data and look for patterns in the prices of stocks to help them decide what to buy. This gives more weight to how a stock has traded in the last few days.
Momentum investing usually gives good returns, but sometimes you can lose a lot of money. Along with momentum investment strategies, it’s best to use other methods.
Dividend investing
The goal of dividend investing, which is also called “income investing” or “yield investing,” is to get a steady stream of income. Stocks with high dividend yields usually make a lot of money but don’t grow as fast. As a dividend investor, it’s your job to find companies that pay dividends and have a good yield. Even better would be if the company could raise its dividend yield.
Strategies for investing in dividends aren’t just about making money. If dividends are put back into a portfolio, it can also see a lot of capital growth. Companies that pay dividends are usually very profitable and, as a result, are also less likely to lose money when the economy is bad.
Passive investing
Passive investing, often known as indexing, is a type of buy and hold investment. However, rather than individual companies, investments are made in indexes. This strategy has various advantages. To begin, investing in market capitalization weighted indexes means you will be investing in the fastest growing, large cap firms in a stock market.
This eliminates the need to pick stocks and assures that you own all of the important ones. Passive investing is most typically done with ETFs, which have relatively minimal costs in comparison to other products. To acquire dozens, if not hundreds, of stocks, you only need to pay commission on a single purchase.
According to research, the majority of actively managed mutual funds fail to outperform their benchmark. Investing in passive ETFs allows you to monitor the benchmark while still paying lesser costs. The amount saved on fees grows over time in the same way that compound interest does. This aspect alone can result in much better long-term returns. Passive investing techniques, like the buy and hold strategy, prohibit investors from destroying their gains by selling at the wrong moment.
Bottom line
When choosing the best way to invest your money, there are a few things to keep in mind. First of all, you should be interested in the approach. If you find an approach interesting, you are more likely to learn about it and do the research you need to do.
Second, your own skills and experience can give you a head start in some areas. Value investors, for instance, need to know how to read financial statements. If you know about certain industries, that can be a plus as well. If you know how to write code, you might like momentum investing and come up with your own algorithm.
Another important thing to think about is how much time you can spend on investing. Investing in value or growth, for example, takes a lot of time because you have to do a lot of research. On the other hand, momentum investing and passive investing don’t take much time. Lastly, you should think about how much risk you are willing to take. This has to do with both your money and your personality. If a risky investment is going to keep you up at night, you might be better off with passive investing or a portfolio with a wide range of assets.
If you find and focus on investing strategies that make sense to you, you’ll be able to become an expert and create your own successful investing process. Most successful investors have taken strategies like these and made them their own by using their own knowledge and experience. As a retail investor, you have the advantage of size and flexibility. You can build on this edge by combining one or two of these ways to invest to make your own unique plan.
