Newbies in the world of investing often have a lot of questions. But the most common one is, what’s the best investment strategy? What’s the best way to achieve my financial goals by investing?
It’s a good question because the underlying reason for anyone venturing into investment is to make money. The investment strategy significantly influences when you will make money and how much.
But which investment strategies are the most successful? Which ones are best suited for newbie investors? Read on and learn more about investment strategy, the four main investment strategies and how to pick the best investment strategy as a beginner. But before that, you need to define the purpose.
Why do you want to invest?
Every newbie has a unique reason for venturing into the investment world. These reasons determine the investment goals. Thus, there is no one-size-fits-all best investment strategy. The goal for investment determines the best investment strategy. Below are some of the most common financial goals:
To build a comfortable retirement nest egg.
To build wealth and supplement income.
To finance a future project like a wedding or college education.
To preserve wealth.
You could have other goals besides these, and you could have more than one. Nevertheless, every beginner has major and minor goals. The best investment strategy will be the one that enables you to achieve your goals most efficiently and effectively. How well it performs depends on the mix of asset classes.
Understand the Asset Classes
As a newbie, there are various options for channelling your investments. Below is a list and short description of the most popular asset classes:
Stocks are also known as equities or shares. When you invest in stocks, you buy a portion of a company and become a part owner. Your stock value increases as the company’s market value grows. Stocks typically carry the potential for high returns, but they are also very volatile and risky.
Bonds are an alternative way of investing in companies or government. When you invest in bonds or debt securities, you loan the entity some money for a specific project. The borrower promises to repay within a set time at a predetermined interest rate. The value of your investment will not grow beyond the predetermined interest. However, the chances of losing value are pretty slim.
Mutual Funds (MFs) and Exchange-Traded Funds (ETFs) pool money from various investors to build diversified portfolios. They may consist of stocks, bonds and other securities and are managed by professionals. The value of the investment largely depends on the effectiveness of the fund managers.
Real Estate Investment Trusts (REITs) invest in real estate and create mechanisms for investors to pool their money into real estate ventures. They work like mutual funds but in real estate assets. Investors buy shares in a REIT and trade the shares just like other stocks.
Retirement plans are more like savings plans. They offer security, tax incentives, high interest rates and hardly any risk. The IRS provides plenty of information, help and advice when choosing a retirement plan.
Several asset classes exist including commodities, precious metals, and private equity, among others. As an investor you should understand the risks and benefits and the costs and taxes associated with buying, owning and selling such securities.
Know the Different Investment Strategies
There are four main strategies: growth investing, value investing, income investing, and index investing. However, your strategy can be bespoke depending on your goals.
Growth investing focuses on growth and entails purchasing securities expected to experience significant growth over the short to medium term. In this strategy, the investor banks on the company living up to their expectation of experiencing rapid growth compared to its peers.
Value investing on the other hand refers to buying undervalued stocks that have the potential to increase in value over time. This strategy was popularised by one of the greatest investors in history – Warren Buffet. The phrase, “Buy low and sell high,” is a buzzword in the investment world. Investors opting for this option focus on companies with solid financial health, stable earnings, and strong business models.
Income investing focuses on gaining a regular income from the investment, especially in the short and medium term. The investor buys stocks from companies that regularly pay dividends and have a variety of benefits for shareholders. In this investment strategy, one can also put their money in assets like bonds and expect to earn interest regularly.
Index investing is a strategy employed by more seasoned investors. The investor buys and holds specific securities and hopes to replicate the performance of another index. The securities are typically index mutual funds or exchange-traded funds (ETF) that closely track the principal index.
Picking an Investment Strategy
Pick an investment strategy based on your goals, risk appetite, how much money you are willing to spend, and the time frame. For instance, you may want to build wealth over a prolonged period. In such a scenario, Value Investing strategy could work for you. On the other hand, if the goal is safeguarding a fund against inflation, pick an investment strategy that focuses on less risk and lower returns.
To conclude
The best investment strategies for beginners should mitigate risk, give them an opportunity to learn the markets, reduce tax exposure and be easy to manage. Beginner investors benefit significantly by working with a professional or opt for passive investment strategies.
Once you pick an investment strategy that aligns with your goals, review and rebalance your portfolio regularly to maintain focus.
