When you start investing on your own, the world of investing may seem wide, often too wide. But you can simplify things with some time-tested strategies. These popular investment choices can help you achieve a variety of financial goals, and help set you up for a lifetime of financial security.
Here are five popular investment strategies for beginners, along with some of their advantages and risks.
Top investment strategies for beginners
A good investment strategy minimizes tapaksuci.id your risks while optimizing your potential returns. But with any strategy it’s vital to remember that you can lose money in the short run if you’re investing in market-based securities such as stocks and bonds. A good investment strategy often takes time to work and should not be considered a “get rich quick” scheme. So it’s important to begin investing with realistic expectations of what you can and can’t achieve.
1. Buy and hold
A buy-and-hold strategy is a classic that’s proven itself over and over. 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 look to own it for at least 3 to 5 years.
Advantages: The buy-and-hold strategy focuses you on the long term and thinking 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 this is how you can ultimately find the stock market’s biggest winners and possibly earn hundreds of times your original investment.
2. Buy index funds
This strategy is all about 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 Composite. Each has many of the market’s top stocks, giving you a well-diversified collection of investments, even if it’s the only investment you own. (This list of best index funds can get you started.) Rather than trying to beat the market, you simply own the market through the fund and get its returns.
Advantages: Buying an index fund is a simple approach that can yield great results, especially when you pair it with a buy-and-hold mentality. Your return will be the weighted average of the index’s assets. And with a diversified portfolio, you’ll have lower risk than owning just a few stocks. Plus, you won’t have to analyze individual stocks to invest in, so it requires much less work, meaning you have time to spend on other fun things while your money works for you.
3. Index and a few
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 percent of your money in index funds and 3 percent in each of Apple and Amazon if you think those companies are well-positioned for the long-term. This is a good way for beginners to keep to a mostly lower-risk index strategy but add a little exposure to individual stocks that 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 get their feet wet on analyzing and investing in stocks, while not costing too much if these investments don’t work out well.
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 hard cash, which you can use for anything you want, or you can reinvest the payouts into more stocks and bonds. If you own income stocks, you could also 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-focused funds, so you don’t have to pick individual stocks and bonds here. Income investments tend to fluctuate less than other kinds of investments, and you have the safety of a regular cash payout from your investments. Plus, high-quality dividend stocks tend to increase their payouts over time, raising how much you get paid with no extra work on your part – making dividend investing one of the best passive income strategies.
5. Dollar-cost averaging
Dollar-cost averaging is the practice of adding money into your investments at regular intervals. For example, you may determine that you can invest $500 a month. So each month you put $500 to work, regardless of what the market is doing. Or maybe you add $125 each week instead. By regularly purchasing an investment, you’re spreading out your buy points.
Advantages: By spreading out your buy points, you’re avoiding the risk of “timing the market,” meaning the risk of dumping all your money in at once. Dollar-cost averaging means you’ll get an average purchase price over time, ensuring that you’re not buying too high. Dollar-cost averaging is also good for helping to establish a regular investing discipline. Over time you’re likely to wind up with a larger portfolio, if only because you were disciplined in your approach.