Sadly, many people want to invest in the stock market without putting in the work of doing proper research. Often, they will buy a couple of shares and hope for the best. Unfortunately, that is definitely not the right way to start your investment journey. There is much more to investing than selecting a company and purchasing its shares.
If you intend to be a savvy and successful investor, you require discipline and a well-planned strategy that will guide your choices every step of the way.
Do you want to learn more about investment strategies? Well, you are in luck! This article will tackle five common investing strategies, shared by investment managers, and you can select the correct strategy for you. When you get to the end of this article, you will be a step closer to achieving financial freedom and growing your wealth.
1. Income Investing
Fundamentally, this strategy requires you to purchase securities that pay dividends. With income investing, you will have a steady return on your investment, and better yet, the schedule will also be stable.
Income investment includes bonds, mutual funds based on dividend stocks, and dividend-paying stocks. The bottom line is income investing deals with securities that pay returns. Often, this is the best type of investing for individuals who do not know much about investing and want a safer investment choice.
If you choose income investing as your strategy, you will be getting an almost guaranteed income from the bonds by the time you retire.
Advantages
– It is a low-risk investment with decent returns: If you have significant capital to invest, there is a minor risk compared to what you would encounter if you were to invest in a business. In addition, you are guaranteed to earn interest from your dividends with income investing.
Disadvantages
– Low rate of return: Income investing offers a low rate of return, and you must be careful about where you invest your money.
– Higher dividends with higher rates of returns are risky. If you are only after income, avoid taking this approach as it could go south and has plenty of risks involved.
– It may take a significant period to see results: Income investing is not a practical choice for individuals who would like to attain financial freedom and retire quickly. The returns from income investing are 1% to 2% over an extended period.
– This investing focuses on dividends instead of the underlying value of the asset or company.
– You need a significant amount of money upfront. That is the only way you will earn worthwhile returns. Typically, an average investor will not experience significant benefits from income investing.
2. Growth Investing
Growth investing strategy primarily focuses on investing in companies with a high growth rate. These include Apple, Google, and Facebook, all pretty young companies with a high price-to-earnings ratio. But above all, these companies have a high potential for future growth.
Peter Lynch popularized growth investing throughout the late 90s with the expression “invest in what you know.” It essentially means that you should buy companies you know are valuable so you can make use of their future growth.
It is worth mentioning that this investment strategy may not apply to the current investment market. That said, growth investing can be a poor choice on your investment portfolio, especially if you are getting into the named companies based on their valuation today. If anything, at best, the returns you get will be ‘okay.’
Advantages
– A long-term investment strategy can lead to high returns.
– There is a high growth prospect as your capital is moved continuously in the stocks. However, note that ultimately, what determines whether or not you will be successful in growth investing is the proper timing.
Disadvantages
– It is easier to predict high growth industries, but it is not easy to predict the companies in the high growth industry that will be successful.
– Growth companies are hard to come by as markets have significantly changed since the 90s.
3. Small-Cap Investing
Small-cap investing focuses on a company’s potential to show significant growth. Unlike growth investors, small-cap investors target riskier and younger companies. Their decision is based on the logic that if you invest in a startup when it’s still young and has cheap shares, then the chances are that when they grow and reach the size of companies like Facebook or Google, the investment will offer massive returns.
Advantages
– Small-cap stocks often grow much faster than big-cap stocks. However, it all boils down to the stock selection one makes.
Disadvantages
– Major stock prices fluctuations: Stock prices usually fluctuate significantly, mainly when large funds or big investors sell or buy stocks. Usually, such volatility often has more to do with the handful of large investors’ actions than anything to do with the company. Therefore, going by this, you may be exposed to a massive loss in capital.
– Selecting the appropriate stock is highly risky: There are plenty of small companies to choose from, and there are equally plenty of small companies that fail to show significant growth or go out of business.
4. Impact Investing
Impact investing involves investors purchasing companies with positive environmental or social impact. They view this type of investment as investing in a cause that matters.
Simply put, individuals who take this approach are usually interested in the positive impact of their investment on the environment and society instead of the financial return. When you think about it, it is almost similar to charity.
It is vital to factor in value investing when it comes to impact investing. For instance, if you are passionate about the environment and yet invest in businesses that pollute the environment, your values are not aligned with your investment choice. As with all types of investments, impact investment has its upsides and downsides.
Advantages
– It feels good to support companies you believe make the world a better place. Impact investing is excellent for individuals who prioritize social change. Impact investors target companies that mirror their values.
Disadvantages
– Impactful companies can be pricey: Such companies may also not have solid profit-generating components that most people are usually keen on in the companies they buy.
– It is more about change aligning with your values and beliefs than it is about growing your money. Therefore, impact investing is a better choice for individuals with a significant amount of money as they have no qualms about losing money to a cause dear to their hearts.
5. Value Investing
Value investing involves purchasing companies that are on sale and priced way below their actual value. Fundamentally, a value investment strategy takes all the principles of every type of investment and emerges on top.
With the right approach to value investing, you will be able to account for your interests and values, get income investment stocks of stocks that are on sale at a discount, and grow from companies, including small-cap. With this logic, value investing may be the best investment approach to take.
Typically, value investors purchase companies they know will give them cash flow in the fullness of time, so they get them at a discounted price. Think of it this way, if an individual offers to sell you a $10 note but at $5 instead of the total price, isn’t that a worthwhile purchase?
Investors like Charlie Munger, Mohnish Pabrai, Ben Graham, and Warren Buffet choose value investing for a reason. With value investing, there is minimal risk and higher returns. If Warren Buffet can choose value investing, why can’t you?
Advantages
– Value investing offers you high returns with minimal risk.
– You can purchase company shares at a discounted price when the company itself is on sale. Buying company shares when it is on sale means purchasing stock when there is some economic fear or problem. The prices will often go back up to the price – or higher – before the economic contraction.
Disadvantages
– Value investing is not a practical investment choice for everyone. If you are an investor who likes to get the benefits from your investment quickly, this may not be a viable choice for you. When it comes to value investing, you need patience.
– You require thorough knowledge when it comes to value investing. The only way to succeed at value investing is to have a base-level understanding of how it works.
