Investing in stocks can be a great way to earn money, but it requires careful planning. This post outlines the 5 best investment strategies for investing in stocks, from understanding the market to researching companies and diversifying your portfolio.
Before investing in any stocks, it’s important to have a plan for when you will sell. Will you hold the stock for a long-term goal or do you want to profit from short-term price fluctuations? Knowing your exit strategy and having a timeline for when you will cash out will help keep your emotions in check and aid in making sure you are investing responsibly.
One of the most important strategies for investing in stocks is to be patient and invest for the long term. Many novice investors get caught up in trying to time the market or jump into ‘hot’ stocks, but this can be a recipe for disaster. It’s better to identify a long-term investment strategy that focuses on steady, sustainable gains. A good rule of thumb is to focus on at least five years’ worth of stock performance before making an investment decision.
5 Best Investment Strategies for Investing in Stocks
When someone wants to start investing for the first time, one of the most profitable sectors to do so is without a doubt, the stock market. However, this doesn’t mean that it is something easy or safe since, like everything in life, some planning is required to obtain good results.
That’s what an investment strategy is; a route to follow to reach the desired destination with the least possible number of drawbacks. The point is that there are many different investment strategies, as well as types of investors. After all, investing in your 20’s isn’t the same as investing in your 50’s, right? With this guide, you’ll learn the 5 best investment strategies for investing in stocks that can help you improve your chances of getting good returns, whether you are a total beginner or an experienced investor.
Why is it important to have an investment strategy?
If we continue expanding on the above definition of investment strategy, you’ll understand why you need to have a strategy — or two or three. Every human being needs rules and guidelines that tell him more or less what he has to do at all times under different circumstances to avoid making mistakes — which in many cases can be fatal.
An investment strategy allows you to organize your ideas to choose the most appropriate investments according to your specific needs, as well as help you determine how you should manage those investments and for how long. But best of all, an investment strategy allows you to minimize risk. The best investment strategies understand the inefficiency of the markets and try to take advantage of that weakness to obtain the highest profits.
Without a plan to follow, you’d be at all times under the guidance of your emotional impulses, something that doesn’t go well with money. If you have a well-defined plan, you’ll be able to generate higher profits over time, in a sustained manner. A good research strategy should also be complemented with a realistic and measurable objective because if you realize halfway that your objective is impossible to achieve, you won’t have enough tenacity to achieve it.
On the other hand, a good investment strategy also has to be demanding, because if the objective is not very ambitious, you will lose motivation along the way, with the consequent risk of abandoning and losing time and money. In addition, to help you establish a clear goal, a strategy should also help you measure your progress and performance since only then you can take action to improve or apply the necessary changes in case you don’t see the expected results.
Tips for investing in stocks for beginners
The following investment strategies have been put into practice by some of the best professional investors in the world at different times and under different circumstances. However, these strategies are still working really well, even off the stock market. Find the most suitable for you.
1.- Value Investing
The fundamental pillar of value investing is apparently quite simple: you must find undervalued companies, buy their shares and wait for the price to rise to its real value. In this way, you reach a safety margin that allows you to obtain a return above the average market return.
Value investing uses a tool known as fundamental analysis to determine the profitability of each investment. In other words, it allows studying the value of each company from an accounting point of view through various internal and external parameters common to any company. Value investing is usually recommended for beginner investors since this is a long-term strategy where you have to wait until the price of the asset and its real value coincide in the market.
The origins of value investing date back to 1928, when Benjamin Graham taught at Columbia Business School. However, the investor who has contributed the most to popularizing value investing among small investors has been Warren Buffett. Thanks to this investment strategy, the Oracle of Omaha has managed to obtain returns ranging from 9% to 13% over a period of 55 consecutive years through his company Berkshire Hathaway.
2.- Growth Investing
The objective of growth investing is somewhat different from that of value investing. Instead of looking for very low prices in the market, the investor looks for companies that analysts consider to have great growth potential, regardless of the value of their shares.
In fact, analysts who focus on this investment strategy see far beyond a company’s financial statements; they essentially observe very qualitative aspects, such as its importance in the sector, its market share, the potential growth of the market in which it operates, etc.
However, this strategy is somewhat riskier than value investing, as if the analyst miscalculates the growth potential of a stock, they can end up losing a lot of money, especially if the stock price is already expensive. This style of investing was brought to life by Phillip Fisher, author of the investing book “Common Stocks and Uncommon Profits” (1931), although the greatest modern exponent of this strategy — comparable to Warren Buffett — is undoubtedly Peter Lynch.
3.- Index investing
Passive management or indexation basically consists of buying investment funds or ETFs that mimic the behavior of the main stock market indices in the world, such as the S&P 500 or the MSCI World, among others.
The main promoter of this investment style was John C. Bogle, considered the father of the Vanguard index funds. Bogle considered that the current price of an asset in the market reflects all the available information that exists (historical, public, and private). In other words, this theory indicates that, in general terms, it isn’t possible — or very difficult — to obtain extraordinary returns that exceed the return of the market.
Since indices constitute a very specific basket of assets, the task of index fund managers basically consists of buying all the assets that make them up in the appropriate proportions with the aim of replicating their behavior in the market.
Since the work of the team of managers and analysts is quite simple, this gives the investor the advantage of paying much lower fees than the rest of the instruments that are managed in a more active way. Also, something that has been observed throughout history is that in general, it’s really very difficult to beat the market; indeed, very few investors have managed to do so in a systematic and methodical way.
Index investing is an investment model that has grown quite a bit in recent years, gaining more and more followers, especially in the United States and Europe. This has resulted in the arrival of robot advisors, which are automated managers that usually use ETFs or index funds to compose investment portfolios, revolutionizing the market thanks to their low costs and their availability of 100% digital.
4.- Buy and hold
The buy-and-hold strategy has proven to be one of the most profitable over time, as well as one of the easiest to use. With this strategy, you don’t need to be an investment expert to get good results; if you act carefully to avoid making too many mistakes, you’ll have profitability assured.
In addition to the basic buy-and-hold tactic of hoping for a big long-term stock price increase, many investors who favor this strategy use a different tactic: buy, hold for a fixed period — not too long — and sell part of their shares when they reach an attractive price. In fact, both approaches are simple to apply and can be used at the same time within a long-term strategy, making them ideal for both beginners and more advanced investors.
5.- Momentum investing
This is a type of active investment strategy that makes use of technical analysis — that is, bar charts, etc. — to study the evolution of the price of an asset in order to make future projections. The central idea behind this strategy is that, if an investor can identify previous patterns in the evolution graphs of an asset, then he’ll be able to predict future price movements quite accurately, gaining an advantage over the market.
To carry out these analyzes and price predictions, the investor uses various quantitative tools, such as Japanese candlesticks, support, and resistance, trend lines, or moving averages, among many others.
The main advantage of this strategy is that it works for any type of asset, regardless of the market in which it operates. In addition, an investor doesn’t need to know the characteristics of a business or the sector in which it operates, nor the particularities of the country where the company is based. According to technical analysts, it’s enough to know the past price of the asset to predict its future evolution.
On the other hand, this model also has some limitations, since it doesn’t take into account some relevant aspects of the investment that, in some industries, can be key to obtaining good returns. Momentum investing is a risky strategy recommended for those more experienced investors who want to make quick profits by moving small amounts of capital in the short and medium-term.
After reading about all these strategies, you may have doubts about which one is the most convenient for you. However, the most appropriate strategy, in any case, is using a combination of several strategies based on your short, medium, and long-term goals.
Note that each of these strategies has provided better or worse results in different economic scenarios and times. It is for this reason that in practice, many investors tend to combine strategies to compose their investment portfolio. Ideally, you should try the strategies that have caught your attention the most and then stick with those that give you the best results.
Here are the key points; investment tips for beginners, and stock market tips and tricks.
5 Essential strategies for investing in stocks