If you’re doing it right, investing in the stock market is much more than picking a few companies, buying a few shares, and hoping for the best.
Smart investors are those that are disciplined and have an investing strategy in place to help guide them as they go along with their investment choices.
Today, I am going to go over five of the most common investing strategies and how to pick the right one for you. After this quick read, you’ll be on your way to growing your wealth and achieving financial freedom.
An Income Investing strategy involves buying securities that are paying dividends. Income investors believe they can expect a steady return on a steady schedule.
Examples of this include; dividend-paying stocks, mutual funds based on dividend stocks, or bonds that produce steady income.
So essentially, income investing involves securities that are paying returns. And this is what people are hoping to do if they don’t know much about investing.
By the time they get to retirement, they’re typically starting to load up on the bond side of these kinds of securities, where they get almost a guaranteed income off of the bonds and a lot less in terms of stocks that are not paying dividends.
- Returns can be decent while keeping the risk pretty low.
- If you have huge capital to begin with, you don’t need to risk it on betting on the success of a business, and instead, you can live off of the interest earned off dividends.
- This type of investing strategy requires a large sum of money upfront in order to see returns that we can get excited about. The average investor that is starting out simply doesn’t have the capital to see major benefits from this form of investment.
- Income investors tend to focus more on the dividend rather than the value of the underlying company or asset they are investing in.
- It can take a long time to see meaningful returns when practicing income investing, which isn’t great for those looking to create financial freedom and retire quickly. We’re talking 1-2% returns over a long period of time.
- If you go for higher dividends and higher rates of return, you’re starting to get into more serious risk that can really backfire on you in the long run. If it’s income you’re after, you certainly don’t want a lot of risk involved.
Be very careful what you put your money into for income investing, and be willing to accept a very low rate of return.
This is an interesting strategy where investors buy companies that have a positive social or environmental impact.
They see this as investing in a cause that matters to themselves. Sounds similar to a charity, doesn’t it?
In other words, people who do that are more interested often in the positive benefit of the things that they own to society, to the environment than the actual financial return.
It’s important to also consider value investing in the impact investing cases. If you are passionate about the environment, for example, but invest in companies that are known polluters, your values are clearly misaligned with your investment choices.
Like any other investment strategy, there are pros and cons to impact investing.
- Impact investors invest in companies that reflect their values, which is a great thing if social change is a priority in your investment journey.
- The simple act of supporting companies that you feel improves the world feels good!
- Impact investments tend to be more about change that aligns to your values rather than growing your money. This means that this type of investment is for people who have lots of money they can risk losing on a cause close to their hearts, rather than on a company they see to be valuable.
- Impact companies can be vastly overpriced and may lack solid profit-making elements that many of us are keen to see in the companies we buy.
A Growth Investing strategy is centered around investing in companies that have high growth rates.
Think of companies like Facebook, Google, and Apple—all relatively young companies, with high PE (Price to Earnings) ratios and lots of potential future growth.
This was popularized by Peter Lynch all through the late ’90s with his expression, “invest in what you know.” Basically, buy companies you know to be valuable to exploit their future growth.
That is not the market we’re in today, and growth investing can be very bad for your investment portfolio if you are entering these companies at today’s valuations.
In my opinion, you’ll see “okay” returns at best.
- A long-term growth investing strategy can result in high returns.
- Capital can continuously be moved into the stocks with the strongest prospect of growth. But in reality, success in growth investing depends on getting the timing right.
- Markets have changed from the way they looked in the ’90s and growth companies are harder to come by.
- Being able to predict high growth industries may be easier than predicting the companies within those industries that will come out on top.
Similar to growth stocks, small-cap stocks focus on the potential of a company to show major growth.
Investors, however, opt for younger, more risky companies, with the idea that if you buy them young and cheap, there is a chance that when they reach the size of companies like Google or Facebook, their investments can show massive returns.
- In general, small-cap stocks, which are tracked by the Russell Index, tend to grow much faster than the overall big cap stocks like on the S&P 500 or the Dow Jones Industrial Average. But at the end of the day, it all comes down to stock selection.
- Choosing the right stock is highly risky, as there is no shortage of small companies that go out of business or fail to show major growth.
- Stock prices tend to show major fluctuations when big investors or large funds buy or sell stocks. This volatility may have less to do with the company itself and more to do with the actions of a few large investors. This can expose you to huge losses in your capital.
Sounds a little scary, doesn’t it?
Value Investing is about buying companies when they are on sale, priced far below their true value.
This type of investing strategy takes principles from all the other types and comes out on top.
When done right, you’ll get growth from companies as well as small-cap and income investment stocks from stocks that are on sale for a discount, while accounting for your values and interests.
For this reason, I think Value Investing is the only real way to go.
Value investors buy companies that they know will produce cash flow in the long run when they are on sale for a discounted price.
Think about buying $10 notes for the price of $5. What’s not to like about that?
There is a reason Warren Buffett, Ben Graham, Mohnish Pabrai, and Charlie Munger choose value investing; the ability to generate high returns with minimal risk. Who doesn’t want to invest like Warren Buffet?
- With Value Investing, you are able to get the highest returns with the lowest amount of risk.
- You can buy companies when they’re on sale! You’re effectively buying stocks during an economic contraction, or during some kind of event resulting in economic problems or fear. And then they tend to go up back to where they were.
- Value Investing is not for everyone, as those who want to reap the benefits quickly may find it challenging. Patience is required in Value Investing.
- This kind of investing also requires know-how and education in order to be successful. It requires you to have an education and a base level of understanding. If you don’t know how to do it, you can lose money—and that’s the catch!
But how do successful investors learn these concepts without all the fluff and extras on the side?
Learn High-Performing Value Investment Strategies
I’ve put together a LIVE 2-Day Virtual Investing Workshop that will be streaming live, where, together with my certified coaching staff, I teach the techniques used by Warren Buffett, Charlie Munger, and myself as well as other value investors to generate cash flow and create financial freedom.
We’ll break down everything you need to know about value investing – from how to pick stocks to how to determine what price you should pay for them.
If you’d like to see how you stack up against experienced investors, take my Investing IQ Quiz!
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.