What is an investment strategy?
6 types of investment strategies
Main types of investments
Beginner investment strategies
The right investment strategy can be one of the best pathways to financial freedom. Whether it serves as a supplement to your regular income, additional savings for retirement, or a way to pay off debt — the best investment strategies can impact your financial health for the better.
That being said, there are so many types of investment strategies that it can seem overwhelming at first. From stocks and bonds to real estate, there are numerous options available. The following guide will cover a few beginner-friendly investment strategies and help you find the right fit for your personal situation and goals. Keep reading to learn more.
What Is An Investment Strategy?
An investment strategy is a specific plan to earn income through alternative sources and is typically determined by assessing one’s future goals, risk tolerance, needs, and financial health. Investments require different levels of involvement and capital to maintain. According to a study done by Pew Research Center, more than half of Americans have some form of investment strategy.
The reason for investing varies from person to person. However, one thing is clear: investments are popularly thought of as a way to bolster one’s finances. The best investment strategies will build off your available capital and hopefully provide a form of financial security. Without getting into the specifics just yet, there are varying levels of risk, time periods, and even involvement associated with the different types of investment strategies.
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How To Choose Your Investment Strategy
The first step to start investing is to take stock of your current financial health. Look at where you spend and save your money, how much income you generate, and any existing investments you may not realize you have. Often a great place to get started is by opening a retirement account through your employer, particularly if they have matching options. Consider what is already available to you and make sure you are using those opportunities to the fullest. Then, look for extra money in your budget to get started with an investment strategy.
6 Types Of Investment Strategies
The best type of investment strategy goes beyond searching for the one that yields the highest profits. When deciding how you will invest your funds (and ultimately time), there are so many more factors to consider. I recommend aspiring investors look at their ideal turnaround time, preferred level of activity, and individual risk tolerance. These considerations will demand a look at your schedule, day-to-day life, age, and more. Read on to get a better idea of these types of investment strategies:
Short Term Investment Strategies
Long Term Investment Strategies
Active Investment Strategies
Passive Investment Strategies
High-Risk Investment Strategies
Low-Risk Investment Strategies
1. Short-Term Investment Strategies
A short-term investment strategy is generally one that provides results before the three-year mark. A few examples of this type of investment strategy are wholesaling, high-interest savings accounts, short-term bonds, and cash management accounts. Investors typically gravitate towards short-term projects if they are saving for an upcoming event (such as a wedding) or if they are interested in earning capital fast to invest in something else. The biggest factor to consider when looking at short-term options is profitability. With a three-year turnaround, many investments simply don’t have the time to generate the same results as longer investments.
2. Long-Term Investment Strategies
Long-term investment strategies are usually what comes to mind when thinking about investing. These include rental real estate, stocks, mutual funds, and gold or collectibles. Long-term investments can generate returns over several years, or in some cases as long as an investor chooses to stay involved in the market. Long-term investment strategies can be a great option as they often involve lower risk and higher returns when compared to other investments. That being said, investors will have to get used to their capital being locked up for long periods of time with this type of investment strategy.
3. Active Investment Strategies
An active investment strategy is exactly what it sounds like: one where the investor is regularly involved. Arguably, the well-known active investment strategy is flipping houses (thanks to popular TV shows on HGTV). Another form of active investing is when investors control their own stock portfolios, rather than working with a financial institution or advisor. Active investment strategies can be great for anyone who wants to be hands-on with their finances, whether that be through portfolio management or getting involved directly in real estate.
4. Passive Investment Strategies
Passive investment strategies allow investors to sit back while their assets generate profits. These options include REITs, rental properties (typically with a property management company), or index funds. While passive investment strategies do require the same amount of research to establish, they don’t require day-to-day involvement compared to other investments. For this reason, many choose this type of investment strategy as a way to supplement their regular income or save for retirement.
5. High-Risk Investment Strategies
Risk is quite the buzzword when evaluating different investment strategies, and it refers to the volatility of a given investment. Most people associate high risk with high reward or profits. In many cases, this can be true, but high-risk investment strategies are not for everyone. More often than not young investors, who would have time to financially recover if anything were to go wrong, will gravitate towards these strategies. A few examples of high-risk investment strategies include investing in startup companies or “playing” the stock market so to speak.
6. Low-Risk Investment Strategies
Low-risk investment strategies can make great first investments for people of all ages. The reason for this is more often than not, investors will see some sort of return without jeopardizing their initial investment or risking large financial losses. Low-risk investments include purchasing bonds, CDs, and savings accounts. Diversification is another aspect of low-risk investing — this means spreading out your capital across several investment types. Diversifying your portfolio in this way can help safeguard against losing all of your funds in the event one investment does not perform well.
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What Are The 3 Main Types of Investments?
A few types of investment strategies have performed well historically, making them great gateways into the world of investing. These basic forms of investments are associated with varying levels of involvement risk, depending on how they are managed. If you are considering investing, review the following basic strategies before getting started:
Stocks: Stocks are essentially shares in a company that investors can buy, hold, and sell to earn profits. By purchasing stocks, investors are putting capital in a company they believe will perform well in time — thus growing their initial investment. Stocks can rise and fall in value, adding some level of risk to this strategy. Although this risk is often counteracted by long investing timelines, and some form of professional portfolio management.
Bonds: Purchasing bonds can be a good low-risk, long-term investment strategy for anyone interested in growing their capital. Bonds are typically secured by a company or the government depending on the type, and provide returns in the form of interest payments. While bonds are not known for high returns, they can be a great way to diversify your portfolio.
Mutual Funds: Mutual funds are accounts that put your capital into multiple investments, such as stocks and bonds. These funds are managed professionally and have a designated investment strategy within themselves. They can have higher minimum investments when compared to other options, however, they are thought to perform well.
The Best Investment Strategies For Beginners
There is a reason so many new investors gravitate towards the same strategies: balance. The best beginner-friendly investment strategies will promise a great balance between risk and potential profitability. Here are a few to kick off your research:
Buy-and-hold investments: Buy-and-hold investing refers to making an initial investment, and maintaining the asset until it appreciates. The simplest example of this is purchasing stocks and then selling them after the shares increase in value. Buy-and-hold is also a popular strategy in real estate, as properties tend to appreciate strongly over time. These investment types are great for beginners as they offer some protection against any short-term dips in the market.
Income investing: This strategy involves selecting assets that generate income and payout at regular intervals. Rental properties are a common example of income investing, as you can earn monthly rental income. Those earnings can then be used to expand your investment portfolio further. Other common income investing strategies include dividend stocks, index funds, and certain bonds.
Growth investments: Another popular strategy for beginners is to identify growth investments. This means looking for emerging companies and purchasing shares before the business takes off. One of the most popular examples of utilizing a growth investment strategy can be seen by looking at Apple shareholders.
Dollar-cost averaging: Dollar-cost averaging is investment-speak for, “I regularly contribute to my portfolio.” With this strategy, investors pick an amount and an interval to add funds to their existing assets. For example, automatically contributing $100 from each paycheck to your 401(k) would help increase the value of that investment account over time. The key benefit of dollar-cost averaging is automating your investment process. You won’t be tempted to time the market or experience every low or high in the cycle.
Value investments: Value investing is essentially the bargain shopping equivalent in the financial world. This strategy involves identifying investments that are priced below value and expected to grow. This could mean looking for property in an up and coming neighborhood or perhaps purchasing stocks of a lesser-known company expected to take off.
Buy the index: Index funds can contribute to a well-rounded portfolio and are a great way to diversify when you are first starting out. Research different index funds to get started, and choose investments that you understand. Note that there are always risks associated with stocks, and buying indexes is often best considered as a long-term strategy.
Index and a few: Another way to make the most of index funds is to divide your portfolio. Typically, investors choose a “safer” index fund for the majority of their portfolio and then reserve a small percentage for “risker” funds. The right divide will depend on your individual risk tolerance, but it can be a good strategy to get the best of both worlds without risking your entire portfolio.
Do You Need Professional Advising?
You do not necessarily need professional advising, but it can be a great benefit for investors without the time to achieve their investment goals.
In recent years, the prospect of robo-advising has attracted many beginner investors to online platforms. These services essentially rely on data to automatically rebalance portfolios according to the user’s goals. Robo-advising is a great option for those who do not have the time to be more hands on, but do not want to commit to work with a financial advisor.
Financial advisors are professionals who can help manage your entire investment portfolio, taking on a set amount of responsibility depending on your wants and needs. These services can be great for investors with larger portfolios who want to work with a real person, often long term. However, they can be costly for those just starting out.
As you can see, there are several types of investment strategies that cater to almost every level of risk, involvement, and timing. Finding the best strategy for you will come down to understanding your personal preferences and financial situation. The best thing I can recommend is to do your research — what works great for a friend may not work for you. There is a lot at play when it comes to investing, but you can find a strategy that bolsters your financial health and helps you achieve your goals with the right determination.
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An investment strategy is a specific plan to earn income through alternative sources and is typically determined by assessing one’s future goals, risk tolerance, needs, and financial health. There are various types of investment strategies, each with its own characteristics and considerations. Some of the main types of investment strategies include short-term investment strategies, long-term investment strategies, active investment strategies, passive investment strategies, high-risk investment strategies, and low-risk investment strategies [].
Short-Term Investment Strategies: These strategies aim to provide results within a relatively short period, usually before the three-year mark. Examples of short-term investment strategies include wholesaling, high-interest savings accounts, short-term bonds, and cash management accounts. Short-term investments are often chosen when saving for an upcoming event or when seeking quick capital to invest in something else [].
Long-Term Investment Strategies: Long-term investment strategies are typically associated with investments that generate returns over several years or as long as an investor chooses to stay involved in the market. Examples of long-term investment strategies include rental real estate, stocks, mutual funds, and gold or collectibles. Long-term investments often involve lower risk and higher returns compared to other investment types, but they require investors to have their capital locked up for extended periods of time [].
Active Investment Strategies: Active investment strategies involve regular involvement by the investor. Examples of active investment strategies include flipping houses and managing one's own stock portfolios. Active investment strategies are suitable for individuals who want to be hands-on with their finances and prefer direct involvement in real estate or portfolio management [].
Passive Investment Strategies: Passive investment strategies allow investors to sit back while their assets generate profits. Examples of passive investment strategies include real estate investment trusts (REITs), rental properties with property management companies, and index funds. Passive investment strategies require less day-to-day involvement compared to active strategies, making them popular for supplementing regular income or saving for retirement [].
High-Risk Investment Strategies: High-risk investment strategies are associated with investments that have higher volatility and potential for higher profits. Examples of high-risk investment strategies include investing in startup companies or engaging in speculative trading in the stock market. High-risk strategies are often favored by young investors who have time to recover from potential losses [].
Low-Risk Investment Strategies: Low-risk investment strategies are suitable for investors who prioritize capital preservation and are willing to accept lower returns. Examples of low-risk investment strategies include purchasing bonds, certificates of deposit (CDs), and savings accounts. Diversification, or spreading out investments across different types, is also a common aspect of low-risk investing to mitigate the risk of losing all funds in case one investment performs poorly [].
It's important to note that the best investment strategy for an individual depends on their personal preferences, financial situation, and goals. Some beginner-friendly investment strategies that offer a balance between risk and potential profitability include buy-and-hold investments, income investing, growth investments, dollar-cost averaging, value investments, and investing in index funds [].
While professional advising is not necessary, it can be beneficial for investors who lack the time or expertise to achieve their investment goals. Robo-advising platforms use data to automatically rebalance portfolios according to the user's goals, making them a convenient option for hands-off investors. Financial advisors, on the other hand, provide personalized management of investment portfolios and can be suitable for investors with larger portfolios who prefer working with a real person [].
In summary, there are various types of investment strategies available, each with its own characteristics and considerations. It's important to research and understand your personal preferences and financial situation to find the best strategy that aligns with your goals and helps improve your financial health [].