The 4 most popular investment strategies for beginners
Everyone says buy and hold is the best investment you'll make, but what other strategies are there? That's what we answer in this post.
A good investment strategy minimizes your risks while maximizing your potential returns. But with any strategy, it’s vital to remember 2 things:
You can lose money in the short run if you’re investing in market-based securities such as stocks and bonds. So it’s good idea to have your other finances, including emergency savings, in order before you begin investing.
A good investment strategy also takes time to show results and should not be considered a “get rich quick” scheme. So it’s important to begin investing early and with realistic expectations of what you can and can’t achieve.
Here are some of the most popular strategies by investors from all across the world.
#1. Buy and hold
A buy-and-hold strategy is the most classic strategy that’s proven itself over and over.
Basically, you do exactly what the name suggests: you buy an investment and then hold it indefinitely. Ideally, you’ll hold the investment for many years, allowing it to compound and grow, but you should look to own it until it no longer makes sense, that can be either within the next 5 years or the next 20 years.
Advantages: The buy-and-hold strategy focuses you on the long term and thinking like an owner, so you avoid the active trading that hurts the returns of most investors. Your success depends on how the underlying business performs over time. And this is how you can ultimately find the stock market’s biggest winners and possibly earn hundreds of times your original investment.
The best thing about this approach is that if you commit to holding an asset for a long period, then you don’t have to think about it too often.
A long-term buy-and-hold strategy means you’re not always focused on the market — unlike traders — so you can spend time doing things you love instead of being stuck monitoring the market all day.
Risks: To succeed with this strategy, you’ll need to resist the temptation to sell when the market experiences turbulence. You’ll have to endure the market’s sometimes steep falls, and a 50 percent or greater drop is possible, with individual stocks potentially falling even more. That’s easier said than done.
2. Index and a few
The “index and a few” strategy is a way to use the index fund strategy and then add a few small positions to the portfolio.
For example, you might have 94 percent of your money in index funds and 6 percent split evenly between Apple and Amazon if you think those companies are well positioned for the long term.
This is a good way for beginners to keep to a mostly lower-risk index strategy but add a little exposure to individual stocks that they like.
Advantages: This strategy takes the best of the index fund strategy — lower risk, less work, good potential returns — and lets the more ambitious investors add a few positions. The individual positions can help beginners get their feet wet analyzing and investing in stocks, while not costing too much if these investments don’t work out well.
Risks: As long as the individual positions remain a relatively small portion of the portfolio, the risks here are mostly the same as buying the index. You’ll still tend to get around the market’s average return, unless you own a lot of really strong or weak individual stocks. Of course, if you’re planning on taking positions in individual stocks, you’ll want to put the time and effort into understanding how to analyze them before you invest. Otherwise, your portfolio could take a hit.
3. Income investing
Income investing is owning investments that produce cash payouts, often dividend assets and bonds. Part of your return comes in the form of hard cash, which you can use for anything you want, or you can reinvest the payouts into more stocks and bonds.
If you own income stocks, you could also still enjoy the benefits of capital gains in addition to the cash income. (Here are some top high-dividend stocks you may want to consider.)
Advantages: You can easily implement an income-investing strategy using index funds or other income-focused funds, so you don’t have to pick individual stocks and bonds here.
Income investments tend to fluctuate less than other kinds of investments, and you have the safety of a regular cash payout from your investments.
Plus, high-quality dividend stocks tend to increase their payouts over time, boosting how much you get paid with no extra work on your part, making dividend investing one of the best passive income strategies.
Risks: While lower risk than stocks generally, income stocks are still stocks, so they can fall, too. And if you’re investing in individual stocks, they can cut their dividends, even to zero, leaving you with no payout and likely a capital loss as well.
Bond yields aren’t always attractive and can sometimes be so low that they won’t outpace inflation, leaving investors with reduced purchasing power.
Also, if you own bonds and dividend stocks in a regular brokerage account, you’ll have to pay taxes on the income, so you may want to hold these assets in a retirement account such as an IRA.
4. Dollar-cost averaging
Dollar-cost averaging is the practice of adding money to your investments at regular intervals.
For example, you may determine that you can invest 500EUR per month. So each month you put 500EUR to work, regardless of what the market is doing. Or maybe you add 125EUR each week instead. By regularly purchasing an investment, you’re spreading out your buy points.
Advantages: By spreading out your buy points, you’re avoiding the risk of “timing the market” — that is, the risk of dumping all your money in at once.
Dollar-cost averaging means you’ll get an average purchase price over time, ensuring that you’re not buying too high.
Dollar-cost averaging is also good for helping to establish a regular investing cadence. Over time, you’re likely to wind up with a larger portfolio, if only because you were disciplined in your approach.
Risks: While the consistent method of dollar-cost averaging helps you avoid going all-in at exactly the wrong time, it also means you won’t go all-in at exactly the right time. So you’re unlikely to end up with the highest possible returns on your investment.
Investing is a wide world, and new investors have a lot to learn to get up to speed. The good news is that beginners can make investing relatively simple with a few basic steps while they leave all the complex stuff to the pros.
Keep in mind that none of these is mutually exclusive, meaning that you can use them all at the same time. For example, you can buy a stock or an index fund at one point and hold it, and then make regular purchases of that same investment to make sure you are not putting in your money all at once.
Which one of these strategies do you like the most? Answer in the comments 👇