If you decide to invest yourself the world of investing might seem overwhelming, and often too vast. However, it is possible to simplify the process with a few tried-and-true strategies. A sound investment strategy will yield good results over time, and allow you to concentrate on other aspects of the investment process. It even makes investing so simple that you’re able to focus more on the things you love doing.
Here are five well-known investment strategies for novice investors as well as some of their pros and cons.
Best investment strategies for novices
A sound investment plan reduces the risk while maximizing the potential return. However, it is important to keep in mind that you may lose money in the short term when investing in market-based securities, such as bonds and stocks. An investment strategy that works requires time to implement and is not to be a “get rich quick” scheme. It is therefore important to begin making investments with realistic goals of what you could and cannot accomplish.
1. Buy and keep
A buy-and-hold method is a well-known strategy that has repeatedly proven its worth. This strategy does exactly what it says that is, you purchase an investment, and then keep it for an indefinite period. It is ideal to never ever sell the investment however, you should try to keep it for a minimum of 3 to five years.
Benefits: The Buy-and-Hold strategy is focused on the long-term and thinks like an owner. This means you can avoid the trades that can hurt the profits of the majority of investors. Your success is contingent on how your business develops over time. This is how you’ll ultimately discover the most profitable stocks in the market and earn up to hundreds of times the amount you put into your initial investment.
The benefit of this method is that if one commits that you will never sell, you’ll never need to contemplate it. If you don’t sell, you’ll be able to avoid capital gains tax, which is a return-killer. Long-term buy-and-hold strategies mean that you’re not constantly focused on the market, unlike traders. You can do things that you love instead of being tied to the market every minute of the day.
The risks: To be successful with this method, you’ll have to be aware of the urge to sell your stock when the market turns rough. You’ll need to bear the sometimes steep drops in the market and the possibility of a 50 percent or more decline is possible, with stocks that are individually able to fall more. This isn’t as easy to do.
2. Purchase the index
This method is about selecting a good stock index and then investing in an index fund based upon the index. Two well-known indexes include the Standard and Poor’s 500 and the Nasdaq Composite. Both include a variety of most popular stocks in the market that give you a broad selection of investment options regardless of whether it’s the only ones you have. (This list of the top index funds will help you get to the right place.) Instead of striving to be ahead of the curve, simply control the market with the fund and earn a return.
Benefits: Buying an index is an easy strategy that can produce excellent outcomes, particularly when you use it in conjunction with a buy-and-hold mindset. Your investment will return the weighted sum of the index’s assets. With a portfolio that is diverse, it’s less risky than investing in a handful of stocks. Additionally, you don’t need to research the individual stocks you want to decide which ones to invest in, meaning it’s a lot less work which means you’ll have more time to do other things to do and your money will work for you.
The risks of investing in stocks are risky, however, diversifying your portfolio of stocks is considered to be the best method of doing it. However, if you’re looking to get the long-term return – which is an average of 10% annually of the S&P 500 – you’ll have to remain in the difficult times, and not sell. In addition, since you’re buying an investment portfolio of stocks and bonds, you’ll receive their typical return and not necessarily one of the most popular stocks. The truth is that most investors, even pros are unable to beat indexes over the course of time.
3. Index and some
“index and a few” strategy “indexes and a few” strategy allows you to employ the strategy of index funds and then add a few smaller positions to your portfolio. As an example, you could have the majority of your funds in index funds and three percent each in Apple as well as Amazon. This can be a great way for novice investors to adhere to an overall lower-risk index strategy, but also add some exposure to the stocks they enjoy.
Advantages: This strategy incorporates the best aspects of the index fund strategies – lower risk, less effort, and good returns and allows more affluent investors to invest in some positions. Individual positions can assist novice investors in getting their feet wet with studying as well as investing in stock without costing a lot in the event that these investments don’t turn out as expected.
Risks are: As long as individual investments are a tiny portion of your portfolio, risks are similar to buying an index. The chances are that you’ll get an average return on the market except if you have many really great or bad individual stocks. If you’re considering making investments in an individual stock, it’s best to invest your time and energy to learn how to assess them before you make a decision to invest. If you don’t, your portfolio might be impacted.
4. Investment in income
Investments in income are those that pay cash typically dividend bonds and stocks. A portion of the return is from cash that you can make use of for whatever you want or reinvest the earnings into additional bonds and stocks. If you have income-producing stocks, you can benefit from the advantages of capital gains, in addition to cash income. (Here are the top dividend ETFs to think about.)
Advantages: You are able to apply an income-focused strategy by using index funds and other funds that are focused on earning which means you don’t need to select individual stocks and bonds here. Investments in income tend to fluctuate more than other types of investments, and also you’ll have the assurance of regular cash payment through your portfolio. Furthermore, high-quality dividend stocks tend to grow their dividends as time passes, increasing what you are paid, without additional effort from your side.
Risks: Although they are less risky than other stocks they are stocks, which means they could be impacted by a fall. If you’re investing in individual stocks, they could cut dividends to zero, leaving no dividend and a loss in capital. The small payouts for the majority of bonds make them undesirable in particular because they’re unlikely to see the most or even any capital appreciation from them. Therefore, the returns you get from bonds might not surpass inflation and leave you with less purchasing potential. Additionally, if you have dividend stocks and bonds in a brokerage account that is not a regular one you’ll be required to pay tax on the dividends therefore, you may wish to keep these investments in a retirement savings account, such as an IRA.
5. Dollar-cost averaging
Dollar-cost averaging is the process of adding money to your investments on a regular basis. For instance, you could decide to put $500 into your investments every month. This means each month you’ll put $500 in the bank regardless of what the marketplace is up to. You could even put aside $125 every week. If you buy an investment regularly and spread your purchase points.
Benefits: By spreading the purchase points you’re avoiding the danger of “timing the market,” which means the risk of pouring all your money all at the same time. Dollar-cost averaging gives you an average cost for purchases over time, which means you’re not investing too much. Averaging your costs is also beneficial to help establish a consistent investment routine. As time passes, you’ll be able to build a larger portfolio, if just because you’re disciplined in your investment approach.
Risks: While the dependable method of averaging the cost of a dollar helps to avoid investing all-in at the wrong moment, however, it also means that you’ll never go all-in at the appropriate moment. This means you’re less likely to get the greatest returns on your investment.
How can I start investing?
It’s a vast world and novice investors need to master a few things to become proficient. It’s good to know that novice investors can start investing fairly easily by following a few simple steps while leaving the more complicated aspects to experts.
Bankrate provides a variety of resources to new investors:
Course How to invest for beginner investors (after an initial sign-up for free)
How do I invest in stocks?
In-depth reviews of major online brokers
The links below will start you on your journey to investing. There’s educational content as well as studies on ETFs and stocks and detailed directions on how to trade and maximize the capabilities of the broker. Most online brokers do not have an account minimum which means you can begin your journey fast, even now, when you need to explore.
Bottom line
Making investments can be among the most rewarding decisions you take for yourself, however, the beginning can be difficult. Make it easier by choosing an investment strategy that you can benefit from and stick to it. Once you are more familiar with investing, you can broaden your investment strategies as well as the kinds of investments that you can invest in.