Strategies to Help You Get the Most From Your Investments
Rather than focusing only on making the most money, the best investment strategies help you achieve your financial goals without forcing you to take more risk than you can tolerate.
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What Makes a Good Investment Strategy?
Investing strategies that offer short-term rewards usually come with a high level of risk. Investment tactics that are successful in the long term typically require research, financial discipline, and a well-defined stock buying philosophy.
Any stock can decrease in value, and any company can fail, so every investor needs to adopt a strategy that takes their tolerance for risk and their financial goals into account. Responsible investing requires a degree of diversification.
Your present financial situation should also have a bearing on your approach to investing. Don’t purchase securities or other investment vehicles if it forces you to use money that you need for necessary expenses. Finally, a good investment plan must meet your goals for both long- and short-term results.
Both professional investors and amateurs have had success with each of the following strategies. However, the best strategy for an individual depends on their plans, risk tolerance, and other variables. The best approach is to match a particular style of investing with your financial plans and needs.
As the name suggests, buy-and-hold investing involves choosing stocks that you think will increase in value over the years (or even decades) and holding onto them. Because you plan to purchase a security and hold it for an extended period, this strategy will not yield short-term gains.
Ideally, buy-and-hold investors pick stocks that have the potential to grow in value steadily over the years. These could include major brands, companies that produce staple goods, or utility firms. These stocks may decrease in value, but the market will eventually start moving upward again, taking the stock with it.
The strategy comes with a low level of risk because you are not affected by market fluctuations, and you rely on companies that have a solid record of success in the past.
Dollar-cost averaging involves spreading the purchase of a stock or other security out over an extended period. The goal is to lower the impact of market fluctuations. For example, rather than buying $10,000 in one stock at one time, you invest $500 per month over 20 months. The goal of this strategy is to minimize the impact of price changes in the short term.
Of course, by not putting your money in the market at once, you also risk missing upward moves from your target stock. Critics say that markets will trend upward in the long run, and the fluctuations that you avoid with dollar-cost averaging are minor compared to long-term profit potential. In the long term, the stock market increases by roughly 9% per year. A diversified portfolio, with stocks from different sectors, should be close to this mark.
Growth investing involves choosing new companies or small companies that you think will grow in the future. The advantage of this strategy is that you can often purchase equities cheaply and then experience exponential profits when the company grows from a small-cap to a mid- or large-cap stock. Examples such as Amazon and Apple are well known for making early investors incredibly wealthy.
The drawback is that it is challenging to predict which companies will be successful in the long run. New companies do not have the performance data and history to allow investors to make an informed decision about future performance. As a result, this type of investing can be risky, and some stocks could lose all or most of their value.
Some investors use a growth investing strategy as a supplement to other, less risky, approaches, or they limit risk by purchasing a small amount of equity in many different small-cap companies. If one or two of these have success, they will make up for all the stocks that failed.
Momentum investing seeks to capture the temporary upward trend in a market (also known as a “bull market”). Investors use fundamental analysis or technical indicators such as the moving average to define a trend and calculate how long it will last.
You can also use tactics such as “short selling” or options buying to profit from downward momentum in the markets.
Momentum trading can lead to higher short-term profits compared to buy-and-hold or value investing strategies. However, this profit potential comes with increased risk. Even professional investors have a difficult time choosing the top or bottom of a stock market movement.
Value investing involves performing fundamental analysis on stocks and finding undervalued ones. You purchase these cheap stocks and hold them until the price increases to a mark that reflects the stock’s actual value.
Famous investors such as Warren Buffett and Benjamin Graham used value investing strategies to amass their fortunes. Value investing is generally successful in the long run. However, it is difficult to define the value of some companies, such as tech firms, because of rapid market innovations and a lack of tangible assets.
How to Pick the Best Investing Strategy
There is no single investment strategy that is going to bring results for every investor. You need to understand the advantages and drawbacks of each approach and then choose the one that best matches your investment goals and tolerance for risk.
Some investors are best off combining more than one approach into a personalized strategy. For example, they could build a retirement plan around buy-and-hold stocks, look for mid-range results with value investing, and set aside a small amount of money to risk on growth stocks.
If you are not sure where to start, you can work with an investment manager or financial advisor to define a customized investment strategy and plan the appropriate amount of funding to meet your needs.
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This post was updated December 4, 2019. It was originally published December 4, 2019.