The investment world may look extremely complicated when you start making your own investments. Some time-tested strategies can help you find your way around in the investment world. A reliable investment strategy will bring you your first profits and let you believe in yourself. With time, you can make use of some more complicated investment instruments.
Below we discuss several popular investment strategies for beginners that will help you make a start. We will also point out the main advantages of each strategy as well as risks.
A review of popular investment strategies for beginners
You need an investment strategy that can let you achieve two goals: minimize risks and optimize profits. Time is often required for an investment strategy to work. You have to be realistic and not expect to make quick money from investments. You have to learn how to be patient.
‘Buy and hold’ strategy
The ‘buy and hold’ strategy is a classical investment strategy that has been in use for a long time. The essence of the strategy is evident from its name: you buy securities of promising companies and hold them in your possession for an indefinite period regardless of all market fluctuations. You have to be prepared to hold the securities for 3 to 5 years at least and preferably more. Warren Buffett who is a world-famous investor says that his favorite investment period is ‘forever’.
Advantages: The ‘buy and hold’ strategy will turn you into a long-term planner and a strategic thinker. It will let you avoid frequent trade thus saving your time. Success will depend on how well your securities are growing in price. If you are lucky, you can earn a hundred times more than you have initially invested.
Risks: First, you may be tempted to sell your assets when their price grows. Chances are that you may sell them too early and then you will regret your decision. Second, the price of your assets may fall dramatically and you may be tempted to sell them at a loss because you believe that the price will continue falling. This might be the wrong decision again. Besides, if you choose to invest into an innovative asset, the ‘buy and hold’ strategy might not suit you because innovations are happening just too fast. It’s hard to predict what the AI technologies may lead to, for example. Similarly to other investment strategies, this one requires strong discipline.
‘Buy the index’ strategy
It has become a truism to say that your investment portfolio has to be diversified. If you buy shares of the companies that such indexes as Standard & Poor’s 500 and/ or Nasdaq Composite contain, your portfolio will be deeply diversified. This fact will make your investment secure.
There is a variation of this strategy called ‘index and a few’. You can put a small portion (about 5%) of your investment money in a few riskier securities. In this way, you may be able to increase your profit margin. On the other hand, the price for risky securities may drop.
Advantages: Because your investment portfolio is deeply diversified, your investment is secure. The price of some shares may go down but then the price of some other shares in your portfolio will rise. Another advantage of this strategy is that you can start with a small capital: you can buy only small portions of each company’s assets.
Risks: Even though your risks will be low, your profit margin is also going to be rather low if you buy the index. On the other hand, if you try to increase your profit margin by investing more in risky shares, you may lose money if their price drops.
Investment in dividend shares
You can also invest in stocks and bonds that pay dividends. When the dividends are paid to you, you can dispose of the money in any way you like. You can take a week off and go to the beach or you can reinvest the dividends into a few more stocks and bonds.
Advantages: As a rule, dividend shares are less volatile in comparison to other types of shares and you can be certain that dividends will be regularly paid to you. Besides, if you invest via a mutual fund and don’t forget to keep your portfolio diversified, you can protect your investments very well.
Risks: In general, dividend stocks and bonds are less risky than non-dividend shares but they can fall too. The company whose dividend shares you hold may cut the dividends or stop paying them completely. As far as bonds are concerned, they normally pay low dividends, which makes them rather unattractive for a small-scale investor. It may happen that your income from bonds does not even compensate for the inflation.
Dollar cost averaging strategy
Dollar cost averaging (DCA) is an investment strategy when you break your investments into several parts and make investments on a predetermined schedule regardless of the market situation.
Why would you want to do so? The goal is to lessen the risks of making losses when investing a large sum of money. When you are buying securities, you don’t know if you are buying them at a low price or at a high price. Is their price going to grow? Is it going to fall? Let us give you an example.
Suppose you would like to invest 5,000 dollars into shares of a certain company. You can break the sum into 8 equal parts and invest 625 dollars once a month. Suppose the price fluctuates between 8 and 15 dollars per share over the period. Using the dollar cost averaging strategy, you may end up paying 10.5 dollar per share on average. In this way, you can avoid overpaying on average.
Advantages: DCA is a wonderful investment strategy for newbies and passive investors. It allows you to avoid the situation when you invest all your money at the wrong point in time. The strategy keeps you from overpaying and losing money.
Risks: Even though you avoid buying at the wrong time with the DCA strategy, you also miss the chance to buy at the right time. This means that your profit margin is going to be just… average.
We must also note that various experiments show that the DCA strategy has been losing its efficiency. Research shows that one-off investments can bring higher profits in the long term in comparison to investments broken into parts.
To conclude, riskier investments bring larger profits but they can also bring losses. Secure investments will save you from losses but your profits are going to be small. You have to find a balance between these two alternatives. Probably, the ‘index and a few’ strategy could be called the most balanced investment strategy. It gives you space for maneuvers.
