The best thing about investing strategies is that they’re flexible. If you choose one and it doesn’t suit your risk tolerance or schedule, you can certainly make changes. But be forewarned: doing so can be expensive. Every purchase carries a fee. More importantly, selling assets can create a realized capital gain. These gains are taxable and therefore, expensive.
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.
Take Some Notes
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 on-going basis?
Even though you don’t need a lot of money to get started, you shouldn’t get start if you can’t afford to do so. If you have a lot of debts or other obligations, consider the impact investing will have on your situation before you start putting money aside.
Next, set out your goals. Everyone has different needs, so you should determine what yours are. Are you intending to save for retirement ? Are you looking to make big purchases like a home or car in the future? Or are you saving for your or your children’s education? This will help you narrow down a strategy.
Figure out what your risk tolerance is. This is normally determined by several key factors including your age, income, and how long you have until you retire. Technically, the younger you are, the more risk you can take on. More risk means higher returns , while lower risk means the gains won’t be realized as quickly. But keep in mind, high-risk investments also mean there’s a greater potential for losses as well.
Finally, learn the basics. It’s a good idea to have a basic understanding of what you’re getting into so you’re not investing blindly. Ask questions. And read on to learn about some of the key strategies out there. 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 this index.
As discussed above, investors can change strategies anytime but doing so—especially as a value investor—can be costly. Despite this, many investors give up on the strategy after a few poor-performing years. In 2014, Wall Street Journal reporter Jason Zweig explained, “Over the decade ended December 31, value funds specializing in large stocks returned an average of 6.7% annually. But the typical investor in those funds earned just 5.5% annually.”1 Why did this happen? Because too many investors decided to pull their money out and run. The lesson here is that in order to make value investing work, you must play the long game. Warren Buffet: The Ultimate Value Investor
But if you are a true value investor, you don’t need anyone to convince you need to stay in it for the long run because this strategy is designed around the idea that one should buy businesses—not stocks . That means the investor must consider the big picture, not a temporary knockout performance. People often […]
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