Choose a strategy that fits your profit objectives and skills
By Ben Taylor Updated June 05, 2024
Reviewed by Jefreda R. Brown
Fact-checked by Timothy Li
An investment strategy is a set of principles that guide investment decisions. Depending on your risk tolerance, investing style, long-term financial goals, and access to capital, you can follow several different investing plans.
Investing strategies are flexible. If you choose one and it doesn’t suit your risk tolerance or schedule, you can make changes. However, changing strategies comes at a cost. Each time you buy or sell securities—especially in the short-term in non-sheltered accounts—it may create taxable events. Additionally, you may realize your portfolio is riskier than you’d prefer after your investments have dropped in value.
Here, we look at four common investing strategies that suit most investors. By understanding the characteristics of each, you will be better positioned to choose one that’s right for you over the long term without incurring the expense of changing course.
Key Takeaways:
- Before determining your strategy, assess your financial situation and goals.
- Value investing requires patience and thorough research.
- Growth strategies need vigilance on executive teams and economic news.
- Momentum investors capitalize on market trends, buying during uptrends.
- Dollar-cost averaging involves regular investments over time, reducing risk.
Getting Started
Before researching your investment strategy, gather some basic information about your financial situation. Ask yourself these key questions:
- What is your current financial situation?
- What is your cost of living including monthly expenses and debts?
- How much can you afford to invest—both initially and on an ongoing basis?
Ensure you can afford to invest before putting money away. Prioritize your current obligations before setting aside money for the future.
Next, set your goals. Are you saving for retirement? A home or car purchase? Your or your children’s education? This will help you narrow down a strategy, as different investment approaches have different levels of liquidity, opportunity, and risk.
Determine your risk tolerance, influenced by your age, income, and time until retirement. Younger investors can afford more risk since they have time to recuperate losses. Risk tolerance is also psychological—consider how you’d feel if your investments dropped significantly overnight.
Strategy 1: Value Investing
Pros:
- Potential for long-term gains as the market realizes a company’s true value.
- Stronger risk/reward relationships and often supported by financial metrics.
- More likely to issue dividends since value companies aren’t as reliant on cash for growth.
Cons:
- Value companies can be hard to find.
- Requires patience and thorough research.
- No guarantee of success even after holding long-term.
Value investors seek stocks they believe are undervalued, looking for prices that don’t fully reflect the intrinsic value of the security. They often use the price-earnings ratio (P/E) to identify undervalued stocks.
Best for: Investors looking to hold securities long-term and focus on gradual growth.
Strategy 2: Growth Investing
Pros:
- Potential for quick capital appreciation.
- Often experience sharpest stock price increases once growth begins.
- Less reliance on technical analysis.
Cons:
- Higher volatility and risk.
- Dependence on economic conditions and capital for expansion.
- Usually no dividends.
Growth investors look for investments with strong upside potential in future earnings, seeking the “next big thing.” They consider the management prowess of a business’s executive team and the competition.
Best for: Investors seeking shorter investing horizons with greater potential than value companies and who are not concerned with dividends.
Strategy 3: Momentum Investing
Pros:
- Potential for short-term gains.
- No need to tie up capital long-term.
- Can be simpler, relying on data-driven approaches.
Cons:
- Requires high skill for proper entry and exit points.
- Dependent on market volatility.
- Increased risk for short-term capital gains.
Momentum investors buy stocks experiencing an uptrend, using technical analysis to guide decisions. They believe winners keep winning and losers keep losing.
Best for: Active traders who can monitor the market daily and are comfortable with higher risks.
Strategy 4: Dollar-Cost Averaging
Pros:
- Can be combined with other strategies.
- Reduces emotional investing.
- Passive and requires minimal maintenance once set up.
Cons:
- Requires steady, stable cashflow.
- Investments should be periodically reviewed despite being automated.
Dollar-cost averaging (DCA) involves making regular investments over time, capturing prices at all levels and lowering the average per-share cost. It’s suitable for most investors, reducing risk and volatility effects.
Best for: Investors with ongoing cashflow and those looking for a disciplined approach to investing.
Conclusion
Choosing a strategy is more important than the strategy itself. Any of these strategies can generate significant returns if the investor commits to it. Engage the approach that suits your schedule and risk tolerance. With a plan in place, you’ll be well on your way to a successful investing future!