Many people invest, but some end up happy with their results while others are disappointed. The outcome of your investing largely depends on the strategies you apply. For beginners, figuring out the best investment strategy for your needs can be challenging.
We have put together a list of four types of investment strategies that can help beginners to invest successfully in any market condition.
- Income investing
- Growth investing
- Dollar-cost averaging
- Portfolio diversification
What Is an Investment Strategy and Why Do You Need It?
Investing involves putting your money to work with the goal of growing it to give you financial security in the future. An investment strategy refers to the plan to grow your money.
There exists a variety of investment opportunities: stocks, bonds, cryptocurrencies, and more. Investors also have varying financial goals, risk tolerance, investment timeline, and capital. As a result, different people will have different investment strategies.
Choosing the Best Investment Strategy
Your financial goals and risk tolerance are among the most important factors that will determine how you invest. When it comes to financial goals, you might invest to build up savings for down payments toward a house purchase. You may also invest to build up a fund to cover your wedding expenses or to pay for your children’s college in the future.
Another common reason to invest is to save for retirement. Depending on your goal, your investment timeline might be as short as a few months or longer than 20 years.
When it comes to your risk profile, some investors have a high risk tolerance while others are risk-averse. The level of risk an investor is willing to take is often linked to age, as those who are closer to retirement can less afford to risk losing money. Younger investors, who usually can wait a long time before cashing out their investments, can generally handle more risk.
Another key factor in deciding the best investment strategy for a beginner is the level of involvement you are willing and able to invest in building and managing your portfolio. For example, some investors may have the time and expertise to pore through companies’ financial statements and calculate the various fundamental and technical ratios by themselves.
On the other hand, time-constrained investors might prefer to look for the best stock research tool, to discover and analyze potentially suitable investments quickly and easily.
You should choose investment strategies that align best with your risk tolerance and can help you achieve your financial goals.
Here are four types of investment strategies for beginners:
With this strategy, you seek to invest in assets that generate a regular income. Your best bet here are stocks of companies with a solid dividend history. When you receive the dividend, you can reinvest it to increase your portfolio, or withdraw the cash to spend.
If you’re looking to live off your investments or to supplement the earnings from your regular job, income investing can be ideal for you. Most companies distribute dividends on an quarterly or annual basis, so you should plan your income expectations accordingly. You can check which companies are paying dividends soon, on TipRanks.
This investment strategy can be ideal for investors with long timelines. It involves investing in shares of companies that may be unprofitable now, but have significant revenue growth and profitability potential. Many of these are startup technology and pharmaceutical companies that are working on potentially breakthrough solutions.
For example, Tesla (TSLA) took time to start making money, and the stock’s price at its IPO was only $17.00 per share. The stock’s fortunes changed dramatically after the company began delivering its electric cars. As the electric cars have low maintenance costs and are environmentally friendly, they continue to attract buyers and drive sales for Tesla. As a result, Tesla turned out to be a highly successful growth stock for investors who spotted it early on.
This is an important investment strategy for beginners to apply. It involves investing a set amount of money regularly at intervals, such as weekly or monthly. For example, you could decide to set aside $150 from each paycheck to purchase additional shares for your portfolio.
You can also apply the strategy to dividends, by automatically reinvesting dividends paid to you instead of withdrawing the cash.
Following this strategy, you would invest the money at the set interval regardless of the market situation. In a down market, dollar-cost averaging can allow you to buy top-quality stocks cheaply.
This strategy can also help you avoid the usually risky temptation of timing the market. If your prediction turns out wrong, a market-timing move could be catastrophic to a beginner’s portfolio.
Those who put all their eggs in one basket cry in the end. In investing, that means you should avoid concentration and instead construct a diversified portfolio. For a beginner, portfolio diversification may seem to be a complicated strategy, but it is actually simple.
To bolster your chances of investing success, you should have a mix of stocks in your portfolio that give you exposure to different parts of the economy. For example, it would be prudent to hold stocks across diverse sectors such as technology, healthcare, utility, and consumer goods.
It is also a good idea to diversify across geography, such as by holding a mix of domestic and international stocks. Another avenue for diversification is market caps; that would have you variously holding micro-cap, small-cap, and large cap stocks.
Markets fluctuate, so portfolio diversity can help maximum your profit in a boom market and minimize your risks in a down market.
Final Thoughts – What Is the Best Investment Strategy for You?
You have several types of investment strategies for beginners to choose from. Your financial goal and risk appetite will greatly influence the strategy you choose. The good news is that you can apply these strategies all at once in constructing your portfolio.
Knowing the type of investment strategies you can pursue is only one secret to successful investment. It also helps to know how to select the right stocks for your portfolio for income, growth, and diversification.
TipRanks gives you the perfect tools and insights to find and analyze stocks to see what best suits your interests. Moreover, TipRanks lets you see what the top-performing investors are buying or selling. Plus, you can stay up-to-date with news and analysis on companies, industries, and the economy. Your search for the best stock research site for beginners ends with TipRanks.