When you start investing for yourself, the world of investing seems broad, often too broad. But you can simplify things with some proven strategies. These popular investment choices can help you achieve a variety of financial goals and provide you with a lifetime of financial security.
Here are five popular investment strategies for beginners, along with some of their benefits and risks.
Top Investing Strategies for Beginners
A good investment strategy minimizes your risks and optimizes your potential returns. But with any strategy, it’s essential to remember that you can lose money in the short term if you invest in market-based securities like stocks and bonds. A good investment strategy often takes time to work and should not be viewed as a get-rich-quick scheme. So it’s important to start investing with realistic expectations of what you can and cannot achieve.
1. Buy and hold
A buy-and-hold strategy is a classic that has proven itself time and time again. With this strategy you do exactly what the name suggests: you buy an investment and then hold it indefinitely. Ideally, you never sell the investment, but you should aim to own it for at least three to five years.
Advantages: The buy-and-hold strategy focuses on the long term and thinks 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 so you can ultimately find the stock market’s biggest winners and potentially earn hundreds of times your original investment.
The great thing about this approach is that if you decide never to sell, you never have to think about it again. If you never sell, you avoid capital gains taxes, a returns killer. A long-term buy-and-hold strategy means that – unlike traders – you are not always focused on the market, so you can spend time doing what you love, rather than spending all day looking at the market has to watch.
Risks: To succeed with this strategy, you must resist the temptation to sell when the market gets rough. You’ll have to weather the market’s sometimes steep declines, and declines of 50 percent or more are possible, with individual stocks potentially falling even further. That’s easier said than done.
2. Buy index funds
This strategy involves finding an attractive stock index and then buying an index fund based on that. Two popular indexes are the Standard & Poor’s 500 and the Nasdaq Composite. They all have many of the best stocks on the market, giving you a well-diversified collection of investments, even if it is the only investment you own. (This list of the best index funds can help you get started.) Instead of trying to beat the market, you simply own the market through the fund and receive its returns.
Advantages: Buying an index fund is a simple approach that can yield great results, especially when you combine it with a buy-and-hold mentality. Your return is the weighted average of the index’s assets. And with a diversified portfolio you run less risk than if you only owned a few stocks. Plus, you don’t have to analyze individual stocks you want to invest in, so it requires a lot less work, meaning you have time to spend on other fun things while your money works for you.
Risks: Investing in stocks can be risky, but owning a diversified stock portfolio is considered a safer route. But if you want to get the market’s long-term returns — about 10 percent a year on average for the S&P 500 — you have to ride out the hard times and not sell. Also, because you’re buying a collection of stocks, you’re getting their average returns, not the returns of the most popular stocks. That said, most investors, even the pros, struggle to beat the indexes over time.
3. Index and a pair
The ‘index and a pair’ strategy is a way of using the index fund strategy and then adding a few small positions to the portfolio. For example, you could have 94 percent of your money in index funds and 3 percent in both Apple and Amazon if you think these companies are well positioned for the long term. This is a good way for beginners to stick to a generally lower-risk index strategy, but still add a little exposure to individual stocks 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 analyze and invest in stocks, while not costing too much if these investments don’t work out.
Risks: As long as the individual positions remain a relatively small part of the portfolio, the risks here are largely the same as when buying the index. You’ll still tend to avoid the average market return unless you own a lot of very good or bad individual stocks. If you plan to take positions in individual stocks, you will want to put the time and effort into understanding how to analyze them before investing. Otherwise, your wallet could take a hit.
4. Income investing
Income investing is owning investments that produce cash payouts, often dividend stocks and bonds. Part of your return comes in the form of cash, which you can use for anything you want, or you can reinvest the payouts in more stocks and bonds. If you own income stocks, you can still enjoy the benefits of capital gains in addition to the cash income. (Here are some top dividend ETFs and high-dividend stocks you may want to consider.)
Advantages: You can easily implement an income investing strategy using index funds or other income-oriented funds, eliminating the need to pick individual stocks and bonds. Income investments tend to fluctuate less than other types of investments, and you have the security of regular cash payouts from your investments. Furthermore, high-quality dividend stocks tend to increase their payouts over time, increasing the amount you get paid without any additional work on your part – making dividend investing one of the best passive income strategies.
Risks: Although the risk is lower than stocks in general, income stocks are still stocks and can therefore fall. And if you invest in individual stocks, they can cut their dividends, even to zero, leaving you with no payout and also a loss of capital. Bond yields are not always attractive and can sometimes be so low that they will not beat inflation, leaving investors with reduced purchasing power. In addition, if you own bonds and dividend stocks in a regular investment account, you will have to pay taxes on the income, so you may want to keep these assets in a retirement account such as an IRA.
5. Dollar cost averaging
Dollar-cost averaging is the practice of adding money to your investments at regular intervals. For example, you can determine that you can invest €500 per month. So every month you put $500 to work regardless of what the market does. Or maybe you add $125 per week instead. By purchasing an investment regularly, you spread out your buying points.
Advantages: By spreading your buying points, you avoid the risk of “timing the market”, i.e. the risk of throwing away all your money at once. Dollar cost averaging means you get an average purchase price over time, ensuring you don’t buy too high. Calculating costs on a dollar basis is also good for helping build regular investing discipline. Over time, you’ll likely end up with a larger portfolio, if only because you were disciplined in your approach.
Risks: While the consistent dollar-cost method 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 get the highest possible return on your investment.
How to start investing
Investing is a wide world, and new investors still have a lot to learn to get up to speed. The good news is that beginners can make investing relatively easy with a few basic steps, while leaving all the complex stuff to the professionals.
Bankrate offers several tools for new investors:
- COURSE: Investing for beginners
- How to invest in stocks
- Extensive reviews of major online brokers
- Best investment books for beginners
The links above will help you get started on your investing journey. You’ll get educational content and research on stocks and ETFs, plus detailed instructions on how to place trades and make the most of a broker’s capabilities. And most major online brokers have no minimum account size, so you can get started quickly, even today if you just want to browse around.
In short
Investing can be one of the best decisions you can make for yourself, but it can be difficult to get started. Simplify the process by choosing a popular investment strategy that can work for you, and then stick with it. As you become more comfortable with investing, you can expand your strategies and the types of investments you can make.
Please note: Bank interest Brian Baker contributed to an update of this story.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
