People are constantly on the lookout for the perfect investment strategy. The Holy Grail of constant profitable returns. Unfortunately, no strategy is perfect in the sense that it will guarantee returns. In fact, I’ll argue that only having one strategy limits your ability to invest profitably.
Currently, investment strategies are a popularity contest. The strategy with the best returns last year or the one most recently written about, tends to get the most attention. Good for the strategy and book publishers, but is it best for new investors just starting out? Hardly, because what works for me may not work for you. Instead, it should come down to your comfort level, knowledge (hopefully), time, and your financial situation.
Trading is definitely not for everyone. It’s time-consuming, stressful, and short-term oriented. Trading can have a timeline of seconds, days, weeks or a couple of months. But the goal is to reach a target price, sell, and walk away. Traders take advantage of short-term trends, news, and speculation to make fast money.
Here’s an extreme example of this. I used to work for a trading firm. The goal was to make a few pennies per trade. The traders would buy a stock or commodity and in a matter of seconds, sell it for a few cents mores. At the end of the day they wouldn’t own anything, hopefully have a profit, and a job the next day.
Buy and Hold Strategy
A buy and hold investment strategy tends to be a bit misunderstood. Too often people equate it with buying and never selling. When they should be viewing it as buy, hold until it’s no longer a good investment, then sell.
The goal is still long-term investing, so you can limit your time involvement and activity. That doesn’t mean buy and forget. You will always have to put some time and work into it.
Index Investing Strategy
The goal of index investing is to invest with simplicity. It has become one of the more popular investment strategies in the past several years, especially with the introduction of ETFs. Basically, index investing or indexing, are investments in a sector, industry, index, or asset class through an ETF.
Indexing can be short or long-term and involve trading or buy and hold strategies. Most index investors will swear buy a long-term buy and hold investment strategy. It’s a great starting point for someone wanting to take on a more active role in their investments with a small amount of time.
Value Investing Strategy
The father of value investing, Benjamin Graham, describes it as “margin of safety.” Which doesn’t mean much unless you read his book, The Intelligent Investor. What Graham meant was to invest in stocks that were so undervalued by the market that they provided low risk, high return investments. Sounds easy enough, but it requires a lot of time and knowledge. If you enjoy reading balance sheets for hours on end, you just found your perfect investment strategy.
Growth Investing Strategy
If you remember the dot-com market boom, it was filled with growth investors looking for the next big company. It also destroyed a lot of wealth when it all came crashing down. Which covers the growth strategies higher risks.
The goal of a growth investment strategy is to get the largest return in the smallest amount of time. It can be speculative, aggressive, and high risk. When done successfully it will produce great returns. When not, you’ll be on the street wishing you had tried a different strategy.
Income Investing Strategy
A more conservative investment strategy that pushes income as the top priority from its investments. This includes high quality dividend stocks, preferred stocks and bonds. It’s the strategy of choice as people move toward retirement and want to concentrate on preserving their invested money and draw an income from it. It’s highly recommended for retirees and those investors that want to keep their risks low.
You throw it on the wall and see what sticks. Also known as throwing darts, close your eyes and point, just guessing, and a buddy’s great stock tip. It’s based on luck and it’s the only strategy that doesn’t work. Yet, there are too many people using it. If you are invested in anything but can’t explain why, you are using the spaghetti approach. Just stop now before you lose big.
Using Multiple Strategies
The best investors will focus on that one investment strategy they are best at but still be able to use another to take advantage of market changes. Even Warren Buffett, well-known for his value investing, did some trading in his day. That doesn’t mean you should change how you invest tomorrow. Instead, just knowing how each strategy works, if you’re comfortable with it, and willing to use it, is enough.
Have you ever wanted to try a different investment strategy? What’s holding you back?