As an intermediate investor, you know that even with small investments, distant goals can become a reality through the power of compounding. Let’s dive into a few intermediate investing techniques if you’ve gone past the beginner stage.
What are Investment Strategies?
The goal of every investment is to grow. You can plan these with different goals, timelines and risks. Three of the most common investment strategies include:
- Growth investing: Focus on companies that exhibit signs of above-average growth.
- Value investing: Buy securities that appear to be trading for less than their intrinsic or book value.
- Buy-and-hold: Out-endure the market turbulence — buy securities with solid fundamentals and hold them over a long period of time.
Best Investing Strategies: Growth Investing
Growth investing focuses on the companies that are positioned to grow at an above-average pace. These companies often have a great value proposition — offer something that competitors cannot easily replicate. Investing in these companies means betting on their ability to build an “economic moat” around their competitive advantage. Tech companies often fall into this category.
Growth stocks often fly high in the mature stages of a market cycle. Although their valuations are high, this is justified by the promise of growth.
Be extra careful when picking growth stocks. The biggest risk from growth investing is not low quality or high volatility. It’s paying prices that are too high. To learn growth investing and other strategies, regardless of your current knowledge, check out our take on best investment strategy courses.
Understand and Use the Priority of Money
Successfully managing your tax exposure can make big differences over the years. For that purpose, it is important to understand the tax benefits certain investment vehicles offer. These benefits can be a deferral of current taxes, like a traditional IRA or 401(k) or eliminating the future taxes (like Roth IRA). Check out how brokerage accounts are taxed.
Understand the Risks and Benefits of a Major Asset
There are 3 major asset classes — each with its own risks and benefits:
- Equities: A buyer becomes a shareholder of a company — domestic or international. These offer the highest risk but also the highest reward.
- Bonds: Becoming a holder of the debt — the value comes from a promise to repay and earn interest at a set date. The most common of these are government, municipal or corporate bonds and yield modest returns (sometimes barely outpacing the inflation) but low risk and with some sometimes tax breaks.
- Cash and cash investments: These come in the form of checking and savings accounts, certificates of deposit and, short-term treasury bills (T-bills). They are prone to inflationary risk but always needed for living expenses or as an emergency fund.
How to Invest Your Savings for Short-Term or Long-Term Goals
The following table shows potential preferences about the investment timeline.
|Short term (1-3 years)||Savings accounts, money market accounts, short-term U.S. government bonds||Low|
|Medium term (3-10 years)||ETF bonds, peer-to-peer loans, certificates of deposit (CDs)||Low-to-Medium|
|Long term (over 10 years)||Equities, equity ETFs, index funds, robo-advisors||Medium-to-High|
Top 10 Strategies for Investing
Here are the top guidelines to keep in mind when approaching an investment plan.
1. Bring balance into your financial plan.
Too much of anything is not going to work great on average. Stay vigilant regarding your goals and don’t be afraid to get overweight in an asset class when the opportunity arises — but have an open-minded, balanced approach.
2. Invest in what you understand.
Warren Buffett invests only in what he thoroughly understands. It is hard to expect that you can match the knowledge of a 90-year-old legend, but every investor has a field of interest. That can be a fantastic starting point.
3. Start investing as early as possible.
Time is your greatest ally. The sooner you start, the sooner will the power of compounding take you to your goal and beyond.
4. Add a 401(k) match to your mix.
The only thing better than money that grows over time is free money that grows over time. If you have matching benefits from your employers, take them! It is likely the easiest money you will ever get.
5. Set up and stick with sound cash-flow management.
As soon as you have a stable income, start automatically setting some money aside for investments. Habitual investing is a big step toward financial freedom.
6. Separate emotions from objectives.
Do not get married to your positions! Periodically reassess your investments (at least quarterly) and be objective. Your positions are not your goals, they are vehicles that take you to your goals.
7. Turn discretionary spending into investing.
Separate needs from wants. It takes a lot to stay disciplined today with advertisements bombarding you from all sides.
8. Put investments and cash reserves in separate buckets.
Needing money at the wrong time can seriously lengthen the journey to your investment goals. By keeping the funds separate and investments diversified you will have enough liquidity even in emergency situations.
9. Make stocks a cornerstone of your strategy.
Despite dire straits during specific time periods throughout history, the stock market returned 10.7% annualized returns over the last 30 years. From the risk management perspective, when it comes to building wealth, it’s hard to match a well-managed stock portfolio.
10. Diversify for a smoother ride.
It’s smart to diversify across the asset classes as well as within the asset classes. But, just like everything, it needs to be balanced. A rule of thumb for stocks is that it takes 20 to 30 different companies to be adequately diversified.
Principles of Investment Strategies
Determining the investment strategy is like going on a journey. You need to know your start and your destination. Then you will come up with the most convenient path to follow to get there.
The following model will show you the key considerations when planning an investment.
Investment Strategy Model, Stjepan Kalinic
Long-Term Goals vs Short-Term Goals
Long-term investments have goals that are years or even decades away. The most important one for most is saving enough money to retire. The biggest advantage that long-term investments have is that you don’t have to worry about short-term fluctuations.
On the flip side, short-term dips might provide you with an opportunity to average down on your best ideas. Short-term investments can be proactive, like saving for a down payment on a house or reactive, like paying off credit card debt. Although it might look counterintuitive, these should carry less risk than average as short-term ones are less tolerant to volatility.
Active vs Passive Investing Strategies
The decision between active or passive investing comes down to your time and knowledge. How much do you know about investing? How much are you willing to learn? How involved you want to be?
If you are a beginner, you might opt for robo-advisors — low-cost automated services based on your preferences. Check out our take on the best robo-advisors.
If you have the knowledge (or are willing to learn), be ready to spend a lot of time gathering the data, researching and formulating investment ideas. It is a lot of work. While the returns might be higher than average, they can also be lower. Like most things, investment research also has diminishing returns. Particularly talented active investors might want to learn intermediate options strategies.
Low-Risk vs High-Risk Investing Strategies
Risk is inevitable with any investment. Even the U.S. government bond still carries a minuscule (but existing) risk that they won’t be repaid. Although researchers tried to explain risk with volatility — it is a flawed comparison, as volatility just magnifies the range of outcomes without necessarily affecting them.
Relationship between risk and return, Author: Howard Marks
When planning risk, the key is to assess the magnitude of the outcome(s) and their probability. Then it needs to be cross-compared with the investment horizon. Investing for the short-term goals should lean toward lower risk while investing for the long-term can have higher risk.
All-in on Financial Responsibility
Investing is a game of poker, and professional players do not believe in luck. They rely on expected value. They have partial information (cards in their hand) just like you — the investor (funds and risk tolerance). When faced with a tough decision, a player will backtrack their opponent’s action and assign them a range. Then, they will compare their cards with that range and come to the expected value of the play.
That is exactly what an intelligent investor does. You need to gauge the market probability, compare it to your personal risk tolerance and calculate the expected value. Regardless of the hand you are holding — there are always options. After all, the key to success is playing the hand you were dealt like it was the hand you wanted.
Frequently Asked Questions
What are the 3 principles of investing?
According to the “father of value investing” Benjamin Graham, the 3 principles are:
- Always invest with a margin of safety.
- Expect volatility and profit from it.
- Know what kind of investor you are.
What are the 5 stages of investing?
- Put-and-take account: First saving when you begin making money
- Beginning to invest: After establishing No. 1 and not running out of money in your checking account after each paycheck
- Systematic investing: Usually investing a set dollar amount from every paycheck
- Strategic investing: Diversification; expanding the scope of investments
- Speculative investing: High risk–high reward; associated with investments like penny stocks or collectibles
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