Choose a strategy that fits your profit objectives and skills
An investment strategy is a set of principles that guide investment decisions. There are several different investing plans you can follow depending on your risk tolerance, investing style, long-term financial goals, and access to capital,
Investing strategies are flexible. If you choose one and it doesn’t suit your risk tolerance or schedule, you can certainly make changes. However, changing investment strategies come at a cost. Each time you buy or sell securities—especially in the short-term in non-sheltered accounts—may create taxable events. You may also realize your portfolio is riskier than you’d prefer after your investments have dropped in value.
Here, we look at four common investing strategies that suit most investors . By taking the time to understand the characteristics of each, you will be in a better position to choose one that’s right for you over the long term without the need to incur the expense of changing course. Before you figure out your strategy, take some notes about your financial situation and goals.
Value investing requires investors to remain in it for the long term and to apply effort and research to their stock selection.
Investors who follow growth strategies should be watchful of executive teams and news about the economy.
Momentum investors buy stocks experiencing an uptrend and may choose to short sell those securities.
Dollar-cost averaging is the practice of making regular investments in the market over time.
Getting Started
Before you begin to research your investment strategy, it’s important to gather some basic information about your financial situation. Ask yourself these key questions: What is your current financial situation?
What is your cost of living including monthly expenses and debts?
How much can you afford to invest—both initially and on an ongoing basis?
Even though you don’t need a lot of money to get started, you shouldn’t start investing until you can afford to do so. If you have debts or other obligations, consider the impact investing will have on your short-term cash flow before you start putting money into your portfolio.
Make sure you can afford to invest before you actually start putting money away. Prioritize your current obligations before setting money aside for the future.
Next, set out your goals. Everyone has different needs, so you should determine what yours are. Are you saving for retirement ? Are you looking to make big purchases like a home or car in the future? Are you saving for your or your children’s education? This will help you narrow down a strategy as different investment approaches have different levels of liquidity, opportunity, and risk.
Next, figure out what your risk tolerance is. Your risk tolerance is determined by two things. First, this is normally determined by several key factors including your age, income, and how long you have until you retire. Investors who are younger have time on their side to recuperate losses, so it’s often recommended that younger investors hold more risk than those who are older.
Risk tolerance is also a highly-psychological aspect to investing largely determined by your emotions. How would you feel if your investments dropped 30% overnight? How would you react if your portfolio is worth $1,000 less today than yesterday? Sometimes, the best strategy for making money makes people emotionally uncomfortable. If you’re constantly worrying about the state of possibly losing money, chances are your portfolio has too much risk.
Finally, learn the basics of investing. Learn how to read stock charts, and begin by picking some of your favorite companies and analyzing their financial statements. Keep in touch with recent news about industries you’re interested in investing in. It’s a good idea to have a basic understanding of what you’re getting into so you’re not investing blindly. Strategy 1: Value Investing
Value investors are bargain shoppers. They seek stocks they believe are undervalued. They look for stocks with prices they believe don’t fully reflect the intrinsic value of the security. Value investing is predicated, in part, on the idea that some degree of irrationality exists in the market. This irrationality, in theory, presents opportunities to get a stock at a discounted price and make money from it .It’s not necessary for value investors to comb through volumes of financial data to find deals. Thousands of value mutual funds give investors the chance to own a basket of stocks thought to be undervalued. The Russell 1000 Value Index , for example, is a popular benchmark for value investors and several mutual funds mimic […]
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