When you start investing on your own, the world of investing can seem vast, often too vast. But you can simplify things with proven strategies. A solid investment strategy can lead to good returns over time and allows you to focus on other parts of the investment process or even makes investing so easy that you can spend more time on what You like to do.
Here are five popular investing strategies for beginners, along with some of their benefits and risks.
Best investment strategies for beginners
A good investment strategy minimizes your risk while maximizing your potential returns. But whatever the strategy, it is essential to remember that you can lose money in the short term if you invest in market-based securities such as actions and obligations. A good investment strategy often takes time to work and should not be viewed as a “get-rich-quick” scheme. It is therefore important to start investing with realistic expectations of what you can and cannot achieve.
1. Buy and keep
A buy and hold strategy is a classic that has been proven 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’ll never sell the investment, but you should be looking to own it for at least 3-5 years.
Advantages : Buy-and-hold strategy focuses on the long term and makes you think like an owner, saving you active trading that hurts returns for most investors. Your success depends on the performance of the underlying business over time. And that’s how you can ultimately find the biggest winners in the stock market and potentially earn hundreds of times your initial investment.
The beauty of this approach is that if you commit to never selling, you’ll never have to think about it again. If you never sell, you will avoid capital gains taxes, a comeback killer. A long-term buy strategy means you’re not always focused on the market – unlike traders – so you can spend time doing things you love instead of being chained to watching the market all day. daytime.
Risks: To be successful with this strategy, you will need to avoid the temptation to sell when the market gets tough. You will have to endure the sometimes steep drops in the market, and a drop of 50% or more is possible, with individual stocks potentially falling even further. It’s easier said than done.
2. Buy the index
This strategy involves finding an attractive stock index and then buying an index fund based on it. Two popular indexes are the Standard & Poor’s 500 and the Nasdaq Compound. Each has many of the best stocks in the market, giving you a well-diversified collection of investments, even if it’s the only investment you own. (This list of the best index funds can help you get started.) Rather than trying to beat the market, you simply own the market through the fund and get its returns.
Advantages : Buying an index is a simple approach that can yield great results, especially when paired with a buy-and-hold mentality. Your return will be the weighted average of the index assets. And with a diversified portfolio, you’ll be less risky than owning just a few stocks. Plus, you won’t have to analyze individual stocks to invest in, so it’s a lot less work-intensive, meaning you have time to spend on other fun things while your money is working for you.
Risks: Investing in stocks can be risky, but owning a diversified stock portfolio is considered a safer way to do it. But if you want to get the long-term returns of the market — an average of 10% per year for the S&P 500 — you’ll have to hold on through tough times and not sell. Also, because you’re buying a collection of stocks, you’ll get their average return, not the return of the hottest stocks. That said, most investors, even the prosstruggle to beat the indexes over time.
3. Indexes and some
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% of your money in index funds and 3% in each of the Apple and Amazon. It’s a good way for beginners to stick with a low-risk indexing strategy, but add a little exposure to individual stocks they like.
Advantages : This strategy takes the best advantage of the index fund strategy – lower risk, less work, good potential returns – and allows more ambitious investors to add a few positions. Individual positions can help newbies get to grips with analyzing and investing in stocks, while also not costing too much if those investments don’t perform well.
Risks: As long as the individual positions remain a relatively small part of the portfolio, the risks here are mostly the same as buying the index. You will always tend to skirt the average market return unless you own a lot of really good or bad individual stocks. Of course, if you’re considering taking positions in individual stocks, you’ll want to spend time and effort understanding how to analyze them before investing. Otherwise, your wallet could take a hit.
4. Income investment
Income-oriented investing involves holding investments that produce cash payouts, often dividend stocks and bonds. Part of your return comes in the form of cold hard cash, which you can use for whatever you want, or you can reinvest the payouts in more stocks and bonds. If you own income stocks, you could also enjoy capital gains benefits in addition to cash income. (Here is some best dividend ETFs you might want to consider.)
Advantages : You can easily implement an income investing strategy using index funds or other income-oriented funds, so you don’t have to choose individual stocks and bonds here. Income investments tend to fluctuate less than other types of investments, and you have the security of a regular cash payment from your investments. Additionally, high-quality dividend-paying stocks tend to increase their payouts over time, increasing the amount you receive without any extra work on your part.
Risks: Although less risky than stocks in general, income stocks are still stocks, so they can also fall. And if you invest in individual stocks, they can reduce their dividends, even to zero, also leaving you with no payout and a capital loss. The low payouts on many bonds make them unattractive, especially since you’re unlikely to enjoy significant or no capital appreciation. So bond yields may not even beat inflation, leaving you with reduced purchasing power. Also, if you own dividend-paying bonds and stocks in a regular brokerage account, you’ll need to pay tax on income, you may want to hold these assets in a retirement account such as an IRA.
5. Recurring Fixed Amount Purchases
Recurring purchases by fixed sums is the practice of adding money to your investments at regular intervals. For example, you may determine that you can invest $500 per month. So every month you put $500 to work no matter what the market does. Or maybe you add $125 per week instead. By regularly buying an investment, you spread out your buying points.
Advantages : By spreading out your buying points, you avoid the risk of “timing the market”, i.e. the risk of pouring out all your money at once. Averaging means you’ll get an average purchase price over time, ensuring you’re not buying too much. The cost average is also useful to help establish regular investment discipline. Over time, you’ll likely end up with a larger portfolio, if only because you’ve been disciplined in your approach.
Risks: While the consistent dollar cost averaging method helps you avoid going all-in at the wrong time, it also means you won’t be going all-in at the right time. You are therefore unlikely to get the highest returns on your investment.
How to start investing
Investing is a big world and new investors 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 the complex stuff to the pros.
Bankrate offers several resources for new investors:
The links above will get you started on your investing journey. You’ll get educational content and research on stocks and ETFs, as well as step-by-step instructions on how to place trades and make the most of the broker’s capabilities. And most major online brokers don’t have a minimum account size, so you can get started quickly even today if you just want to look around.
At the end of the line
Investing can be one of the best decisions you can make for yourself, but getting started can be tough. Simplify the process by choosing a popular investment strategy that may work for you, then stick with it. When you become more proficient in investing, you can expand your strategies and the types of investments you can make.
Note: Bankrate Brian Baker contributed to an update for this story.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past performance of investment products does not guarantee future price appreciation.