Are you intrigued by the idea of managing your own investments? If so, you should probably look into different types of investing strategies to learn which one is best for you.
- Value Investing
- Growth Investing
- Dollar-Cost Averaging
- Momentum Investing
- Piggyback Investing
- ESG Investing
- Index Investing
- Core-Satellite Investing
- Dividend Investing
Investing is the process of purchasing something with the expectation of it generating a financial return. This might include a property, a famous painting, or securities like stocks and bonds. People who invest their money are called retail investors.
Usually, these retail investors make periodic contributions to something like a retirement account, which is often under the control of a money manager. This money manager or team of financial professionals will exercise a range of investment strategies to obtain a return for their clients and customers. But if you like the idea of managing your own assets, you should explore trading strategies.
Take note that risk appetite is an important factor in terms of your investing strategy. Someone with a fixed income is going to have a lower risk tolerance than someone who has expendable extra cash to invest. Someone who is at the beginning of their investing journey with decades ahead of them can tolerate market swings a lot better than a retired person who needs a stable portfolio to create some consistent income.
9 Types of Investment Strategies
Analyzing risk appetite looks at a variety of factors such as age, financial goals, and available capital. Once thatâs figured out, you will know which type of investment strategy can work for you.
1. Value Investing
Youâre probably familiar with value shopping. Value investing isnât so much different. A value shopper will walk right past department store displays with overpriced trendy clothing and head right to the last chance section. This clothing is just as good, but itâs priced lower because itâs not in style.
The same is true for stocks. Amazon, Google, and Tesla are making a lot of noise on the stock market. But there are other stocks out there that cost less and may give you a better return for your money. The way to gauge this is with a metric called the price-to-earnings ratio, or PE ratio. This number tells you how many dollars youâd need to invest in a company to receive a one-dollar return. Companies with PE ratios of 25 and under tend to be good values, while companies with higher ratios are overpriced.
2. Growth Investing
Growth investing focuses on companies with a higher-than-normal expected growth rate. An investor using this strategy will focus on companies with the greatest potential for a stock price increase. This often happens in cutting edge industries, especially technology. Itâs less likely to see stocks in the consumer staples sector (like food and beverage) see serious growth. But companies like Tesla, Google, and Amazon have delivered investors phenomenal returns over the years.
Of course, as you can see, the challenge is getting in at the right time, and picking companies that will take off. Many times this requires some complex analysis outside the technical ability of most retail investors. However, it is possible to get an inside scoop on some hot picks through a seminar or investing newsletter.
3. Dollar-Cost Averaging
Dollar-cost averaging is potentially the best method for long term growth, especially for investors on a personal budget. This method involves investing the same amount of money into stocks or even a managed mutual fund every time on a regular basis, whether thatâs once a month, once a week, or through a portion of oneâs weekly paycheck.
The premise of dollar-cost averaging is that itâs often more fruitful to ignore the ups and downs of the stock market and instead consistently invest for the long term, seeing great returns over time. When stock prices are down, your consistent allocation will purchase more, and when they are up, it will purchase less. Over time, that can average out and yield excellent long-term results.
4. Momentum Investing
Momentum investing is similar to growth investing. This type of investing takes into greater consideration immediate price trends as a gauge of a stockâs momentum. Momentum investing could be a short-term process similar to swing trading or active day trading, or it could involve holding securities for a longer range of time. Either way, momentum investing is another one of those strategies usually best executed with the assistance of financial software that can crunch the numbers.
5. Piggyback Investing
Piggyback investing is when an investor copies someone who knows what theyâre doing. Many piggyback investors copy Warren Buffet and mimic what he does. At the time of this article, the biggest holdings in Warren Buffetâs stock portfolio are Apple, Bank of America, American Express, Coca-Cola, and Kraft-Heinz. It seems likely that if Warren Buffet has invested in these companies, they are good investments.
If you are copying what he does, you would have these stocks in your portfolio, and balance it out the same way. This means that whatever percentage of his portfolio is taken up by each of these stocks, you would do the same (for example, 40% of his portfolio is Apple, while 14% is Bank of America). Remember that when piggyback investing, investors periodically rebalance their portfolios. You will have to periodically see how their portfolio is balanced and do some buying and selling accordingly.
6. ESG Investing
ESG stands for Environmental, Social, and Governance. These metrics speak to how well a given company meets certain standards of sustainability. This relates not only to such elements as reducing pollution but to how employees feel respected and valued in the workplace.
ESG investing involves selecting companies that have a great ESG score, which is determined by about 8 different ratings agencies. At the time of this article, Microsoft, Accenture, and Salesforce are in the top ten ESG stocks. Investors may choose to engage in ESG investing because they believe that market demands will shift towards more sustainable companies. Alternatively, ESG investors may invest in these companies because they feel it is more ethical than investing in other companies that do not place as much emphasis on sustainability.
7. Index Investing
Index investing is also often called passive investing, although the two are not necessarily synonymous. Investing in indexes is often a lot more passive than investing in individual stocks. In terms of personal finance, index investing can be a good choice because it is very simple. Indexes are essentially groups of stocks tied by a common factor, whether thatâs the industry or a certain performance threshold.
The Dow Jones Industrial and the S&P 500 are both indexes. A wide range of smaller indexes exists that can afford investors unique trading and investing strategies. For example, if you want to invest in lithium batteries but donât know where to begin, there are indexes of companies producing them.
8. Core-Satellite Investing
This investing approach is actually what most managed money accounts do behind the scenes. The core component refers to holding long-position stocks. These securities could be in very stable investment spaces like consumer staples and banking. The stocks themselves might be augmented by other investments that are traditionally stable, like bonds and precious metals, in an approach that is called multi-asset investing.
The satellite component of the portfolio are stocks that will be bought and sold to boost the portfolioâs growth. Usually, the core section is about 70% of the portfolioâs value, while the satellite section is around 30%. Asset allocation in various financial markets (stocks, futures, precious metals, cash) is a delicate science that requires experience, knowledge, and these days, the right software.
But even so, a casual retail investor can somewhat replicate this strategy with fewer risk factors by allocating 90-95% of their portfolio to proven stocks, and the other 5-10% to an experimental alternative investment or alternative markets.
9. Dividend Investing
Dividends are portions of the company's profits that are passed out to shareholders. Not all stocks pay dividends, but of the ones that do, those retail investors who hold those stocks will enjoy a nice deposit to their brokerage account as they share in company profits. Many large, stable companies with a wide moat (that is, low competition) offer dividends. Think of established businesses like Coca-Cola, Procter & Gamble, and Wells Fargo.
The strategy of dividend investing focuses mainly on purchasing stocks that pay such dividends. Over time, it can result in a truly powerful stream of passive income. For example, if the average dividend payout of your investments is 3%, and you have a six-figure portfolio, this will pay an annual dividend of $3,000. Now imagine 10 times that number. If you have a million dollar portfolio, dividends alone will be $30,000. While it may seem hard for a casual retail investor to envision a seven-figure net worth, over several decades of consistent investing, this is certainly more than possible.
Which Type of Investment Strategy is Best for Me?
Portfolio construction and portfolio management are not for everybody. An individual investor is often not equipped like an institutional investor to understand how to turn market conditions into cash flow or even unrealized gains. For most people, the best investment advice is to look to institutional investors for assistance in creating an investment portfolio.
A money manager at your bank can meet with you to discuss your investment objective (or objectives), whether that includes saving up for retirement and/or paying off your home. They will be able to assess your investment risk tolerance, which changes with age. For example, as mentioned in the intro a younger investor with more years of investing ahead can tolerate periodic market volatility, while an older investor who needs a fixed income cannot.
The only decision such an investor will have to make is the decision to stay consistent and dedicated by regularly allocating a portion of their earnings to their retirement account or managed investments. In the meantime, investors can accelerate their progress by learning how to get out of debt by refinancing loans to a lower interest rate or making additional payments to eliminate the principal and the interest.
This strategy among investment types may not be the most exciting, but over time research has shown that it yields higher returns than those portfolios that are actively managed by inexperienced traders. To that end, you might consider setting up a direct deposit with your HR department or using an app like Robinhood or Acorns to deposit it towards the right mix of growth stocks and proven large Blue Chip companies.
