If you’re new to investing, you may be wondering what an appropriate investment strategy looks like. While it may seem like the best investing strategies are only the ones that have great historical returns, that isn’t always true. Some investment strategies are beneficial due to the fact that they work for your objectives and are tolerant to risk.
These are some common investment strategies you may see used frequently.
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Using fundamental analysis to invest is one of the oldest and most basic styles. This method, called growth investing, is an active investing strategy that involves analyzing financial statements and factors about companies. Through this, investors can learn if the company’s stock has the potential to grow in the future.
With growth investing, you typically construct a portfolio of 10 or more individual stocks. Though, beginners may prefer to build up to this number.
This strategy reflects what investors typically do in healthy economies, as growth stocks normally perform best in mature stages of a market cycle.
A financial plan can help you prepare for the future by allowing you to lay out all of your financial goals in a concise document. With a financial plan available, it’s easier to understand if all of your financial needs are being met. Although financial plans don’t have a set template, a licensed financial planner should be able to produce a plan that assesses risk, informs investments, and minimizes tax burden. An estate plan can also be included to arrange for the benefit and protection of your heirs.
Financial planning involves several steps. First, you calculate your net worth, then you determine your cash flow, and after that, you balance priorities. Here’s a little more information about each step.
Active trading is a more difficult approach to investing. Many active traders use technical analysis of a stock to determine changes in the price. Active trading isn’t as closely associated with the underlying businesses attached to each stock. Through active trading, you can profit from short-term moves, giving you the chance to add leverage to your strategy.
When engaging in active trading, you can work on any time frame you like. By taking price data from exchange feeds and charting platforms, you can see price patterns and market trends. Using these, you can predict future price movements and make strategic investments.
To maximize your profit, always make sure to set parameters for risk, reward, and win-loss rates.
Sometimes stocks are sold at a discount. Value investors specifically target these stocks by purchasing index funds, ETFs, and actively-managed funds that hold value stocks. In some cases, purchasing value stocks directly may be a better strategy.
As a buy and hold investor, you operate on the belief that “time in the market” is better than “timing the market”. Through the buy and hold strategy, you buy securities and hold them for long periods of time, hoping they overcome short-term volatility. With a buy and hold strategy, you’re basically arguing that holding securities for longer periods requires less frequent trading. This minimizes trading costs and potentially increases the overall net returns of the portfolio.
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