A new wave of investors is crashing into the market for the first time. If you’re like many beginners, you see value in investing strategically. The bad news? Financial advice tends to be full of confusing jargon or windy explanations that make it hard to know where to start investing.
We’re here to help. Read on for a simple breakdown of what you need to know as a new investor, along with seven investment strategies for beginners.
Buy-and-hold ETF investing is one of the best investment strategies for beginners.
Before diving into more specific investing tactics, it’s important to highlight this simple investment strategy for beginners: buy-and-hold ETF investing. With this strategy, you buy an exchange-traded fund (ETF) and keep it for the long run. It can be a profitable strategy if you invest in companies that shrug off short-term market headwinds and climb to long-term profit.
Are you wondering why ETF buy-and-hold strategies are a great investment strategy for beginners? For one, you don't have to spend hours monitoring market news, placing trades, and timing markets. At the same time, this strategy reduces the risk of making poor financial decisions based on your emotions. If you build a diversified portfolio using high-value ETFs, it’s possible to comfortably buy and hold through market swings and bring in a steady stream of profit.
Wondering why ETFs are such a wise go-to target for beginners? ETFs fit soundly in this buy-and-hold strategy because they spread out risk and tend to be anchored by reliable companies. Here are a few advantages of ETFs:
- They can help diversify your portfolio.
- They may be less susceptible to sharp market swings.
- They generally tend to be low-cost and tax-efficient.
Which 4 investment strategies can help you determine what to buy?
So, you’ve decided that you want to use an ETF buy-and-hold strategy to grow your early investments. You still need to answer an important question: “What should you buy?” Here are the best investment strategies to consider as you decide where to put your money:
1. Broad Market Investing
With broad market investing, you target funds that follow a common index. This approach will give you broad exposure through indexes that are spread out across the market. For instance, you may decide to invest in SPY, which follows the S&P 500.
So long as you follow a buy-and-hold approach within this strategy, you can expect your returns to mimic the broad market. Before you invest, ensure you understand how each index is constructed and how heavily different individual securities are weighted within the fund.
2. Sector Trading
With a sector trading strategy, you invest in companies that fall within a single area of the market. Sector traders will target a specific part of the economy they believe will rise or fall in the future. This strategy can be profitable if you successfully identify how specific sectors in the market will move. However, it can be risky if the entire sector falls to pieces.
As you can see in the above illustration, sector performance can vary widely from year to year. The chart displays how the 11 S&P 500 sectors performed each calendar year compared to each other and the index. For example, you can see how the financial and real estate indexes were among the worst-performing sectors leading up to and during the Great Recession. Understanding economic trends and market fluctuations are key to succeeding with this type of strategy.
3. Active Funds
Active funds are ETFs that you can buy and hold while your fund manager manages your holdings. Essentially, this is an approach in which you seek more aggressive returns, but leave it to the experts to make frequent trades. Although this investment strategy may include more buying and selling than a passive investing strategy, you may be exposed to less overall market risk by trusting your money with a professional who actively manages an ETF.
On the whole, it is a good idea for beginners to spread their investments across a blend of all three investment sources: broad markets, sector trading, and active funds.
What are the 4 best investment strategies to evaluate stock market holdings?
Before buying an ETF, examine which stocks and what percentage of each holding make up that ETF. When it comes time to evaluate these ETF holdings, beginners need a second strategy. Here are a few investing strategies to use as you dig into each fund’s holdings:
1. Value Stocks
With value investing, you buy stocks worth more than they are currently trading for on the market. With this strategy, you recognize that the market will swing on a short-term basis, so you invest in stocks that have strong fundamentals and high long-term value.
Seasoned investors and successful beginners alike will use value investing to underpin their moves within the stock market. In fact, value investing is lauded by some of the most successful investors in history, including Warren Buffet and Charlie Munger.
2. Growth Stocks
Growth stock investing is an investing strategy in which you try to pick out companies that are just starting or are vastly undervalued. The idea here is to buy stocks that will balloon in the future. This strategy can provide hefty returns if you pick a position that takes off. However, these stocks can be risky—especially in a shaky economic market— if the stocks are part of a temporary trend or overvalued.
3. Momentum Stocks
Momentum stocks are holdings that are experiencing an uptrend. To earn a profit, you will want to pick momentum stocks that you believe will keep surging upward after you buy them. Of course, it isn’t always a guarantee that momentum stocks will keep climbing once you pull them into your portfolio, but holding on to the stocks that do can increase your long-term returns.
4. Quality Stocks
Quality stocks are holdings that display the strongest fundamentals in the market. These stocks tend to include best-in-class companies. Investing in quality stocks means you are buying an equity share in companies that have a proven record of high returns. Although quality stocks may be priced higher than other stocks, they also carry less risk because they tend to be backed by financially sturdy companies.
The best investment strategies are fueled by education.
Regardless of what strategy or strategies you ultimately choose, the best investments are built on knowledge. As a beginner, the best thing you can do is examine your investment options and pick the best tactic for your situation.
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Tags: Diversification, ETF, Investing
Your Investment strategy is like your game plan to building your portfolio. But it is very important that you find the one that’s right for your objectives and situation in life. A 25 year old should have a different strategy then a 65 year old.
We generally spend a decent amount of time planning for our workday, a vacation, and buying a car, but we often forget the most important plan of all: mapping out our investment strategy and plan for growing old and retiring.
Investing your money without an investment strategy is like a football team going into a game without a playbook. Although investment strategies are not required, they significantly improve your chances of winning. Creating an investment strategy should be your #2 step after you learn some of the basics of investing in the stock market like how to read stock quotes and how to buy stocks and other “getting started” info found here.
The Importance of Defining Your Investment Strategy
Most financial planners agree that the following are the beginning steps to a successful investment strategy:
- Stop paying high interest rates on credit cards and other debt.
- Try to save 10% of your income
- Have at least 3 months of expenses saved in cash
- Invest a fixed dollar amount each month in the stock market
- Plan on investing in stocks for at least 5 years
So, if you are at step 3 and ready to invest in the stock market, what stocks do you buy?
Having an investment strategy is like having an instruction booklet guiding you through the investment process. It will help you discard many potential investments that may perform poorly overtime or that are not right for the investment goals you are looking to achieve.
When creating an investment strategy, it is important to quantitatively figure out what you are seeking to accomplish. Stating that you simply want to make money or become wealthy is not helpful. A better objective would be to say “I want to achieve an 8% average annual return on my investment contributions over the next 10 years in order to have a $200,000 portfolio that will be used to purchase a 2nd home.” The more specific the objective, the better. And it doesn’t stop there. An investment strategy is useless without a proper understanding of it. There are many different stock investment strategies that apply to different investment objectives, the key is pairing the right strategy with the right objective.
Once you have gained some familiarity with the stock market terminology and are ready to take the next step, we have found this one newsletter is the BEST for beginner investors to GET THE BEST STOCK PICKS that have beat the market consistently over the last 5 years. In fact, their last 24 stocks picks have an average return of 111%. That means you would have more than doubled your money in 12 months had you bought just a little of each of their picks. Learn more about this newsletter and get their next stock 24 picks for only $99.
Types of Investment Strategies
Value Investing
There are many investment types, but the most popular strategy, especially for beginners, is value investing. An investment strategy made popular by Warren Buffet, the principle behind value investing is simple: buy stocks that are cheaper than they should be based on their long-term earnings potential. Finding stocks that are under-priced takes a lot of research on the fundamentals of the underlying companies. And once you’ve found them, it may take a few months or years for their price to rise. This buy and hold technique requires a patient investor who wants to keep their money invested for a few years, which is why it’s one of the best investment strategies for beginners. While the stock market has returned about 8% per year over the last 100 years, there are a few people like Warren Buffet whose stock picks have significantly outperformed the market as a long term investment strategy. If you are planning on keeping your money invested in the stock market for at least 5 years and you want the best source for excellent “value stock” recommendations then consider the Motley Fool Stock Advisor. Take a look at the performance of the Motley Fool stock picks over the last 5 years, as of the date in the table:
The summary of the Motley Fool performance is this: Over the 5 year period from 2016 to 2020, the average return of all 120 of their stock picks is 206% and 84% of those picks are profitable. That means their stock picks beat the market by 129% Without a doubt, if you have at least $500 to invest in the stock market each month and you plan on leaving that money in the stock market for at least 5 years, the Motley Fool is the best place to get stock picks. If you are a new subscriber, you can get the next 12 months of their stock picks for only $99. All investors should understand at least the basics of value investing.
Income Investing
A great way to build wealth over time, income investing involves buying securities that generally pay out returns on a steady schedule. Bonds are the best known type of fixed income security, but the income investing strategy also includes dividend paying stocks, exchange-traded funds (ETFs), mutual funds, real estate investment trusts (REITs), and other types of investment funds. Fixed income investments provide a reliable income stream with minimal risk and depending on the risk the investor is looking to take, should comprise at least a small portion of every investment strategy.
Growth Investing
An investment strategy that focuses on capital appreciation. Growth investors look for companies that exhibit signs of above-average growth, through revenues and profits, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios. What Warren Buffet did for value investing, Peter Lynch did for growth investing. A relatively riskier strategy, growth investing involves investing in smaller companies that have high potential for growth, blue chips and emerging markets.
Small Cap Investing
An investment strategy fit for those looking to take on a little more risk in their portfolio. As the name suggests, small cap investing involves purchasing stock of small companies with smaller market capitalization (usually between $300 million and $2 billion). Small Cap stocks are appealing to investors due to their ability to go unnoticed. Large-cap stocks will often have inflated prices since everyone’s paying attention to them. Small cap stocks tend to have less attention on them because: a) investors stay away from their riskiness and b) institutional investors (like mutual funds) have restrictions when it comes to investing in small cap companies. Small cap investing should only be used by more experienced stock investors as they are more volatile and therefore difficult to trade.
Socially Responsible Investing
Investing in a stock portfolio built of environmentally and socially friendly companies while staying competitive alongside other kinds of securities in a typical market environment is called socially responsible investing. In today’s modern world, investors and the general public expect companies to maintain some social conscience, and they’re putting their money where their mouth is. SRI is one path to seeking returns that poses a significant collateral benefit for everyone.
How Choose An Investing Strategy That’s Right For You
Setting up your investment strategy is like buying a new car, before you look at the different models, you need to figure out what style suits you best. And just like cars, there are many investment types to choose from when creating an investment strategy. When choosing the right investing strategy, there are questions that need to be answered first. What is your investment horizon? What returns are you seeking to achieve? What amount of risk are you able to tolerate? What are the funds in this investment to be used for? Answering these questions will ultimately also help in building your portfolio.
Determining what will be your breakdown between cash, fixed-income securities and stocks is a good start towards creating your investment strategy. The breakdown of your asset allocation ultimately depends on your risk tolerance. A conservative investor may prefer to hold 80% of his portfolio in fixed-income and 20% in stocks. The reverse would be true for an aggressive investor, while a balanced investor will follow a 50-50 split.
In terms of specific stock market strategies within your asset allocation, if you are a high risk investor with a long investment horizon, you may want to include small cap and growth investing in your portfolio. If you have a moderate risk tolerance and shorter investment horizon, you may be more suitable for value and income investing. If you have a low risk tolerance and short investment horizon, you may want to focus solely on income investing. For those looking for companies that aim to do no harm, you can add socially responsible assets to your portfolio with relative ease. It is also important to adapt to the investment strategy you are most comfortable with. Someone with a knack for choosing growth stocks may make that strategy the priority in their portfolio.
THE 3 BEST TOOLS FOR BEGINNER INVESTORS
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