The best investing strategies are not always the ones that have the greatest historical returns. The best ones are those that work for your objectives and risk tolerance. In other words, the best one is the one that works best for you.
Investing styles and tactics are like the clothes that fit you best. You don't need anything pricey or bespoke. You need something comfy that will last a long time. This is even more the case if you are planning for the long term. (Think 10 years or more.)
Don't adopt an investment strategy and drop it for some hot new trend you found online. Stick to the time-tested basics. See which of the best investing strategies works for you.
Best Investing Strategies: Growth Investing
Growth investing using fundamental analysis is one of the oldest and most basic styles. This is an active investing strategy. It involves analyzing financial statements and factors about the company behind the stock. The goal is to find a firm whose metrics show the potential to grow in the years ahead.
This style of investing looks to construct a portfolio of 10 or more individual stocks. If you're a beginner, it can take a lot of time to do the research needed to make this a success. But, this strategy is what most fund managers use to get returns.
Growth stocks often perform best in the mature stages of a market cycle. The strategy reflects what investors do in healthy economies. (Gain higher expectations of future growth and spend more money to do it.) Tech companies are good examples here. They are often valued high but can grow beyond those valuations when the environment is right.
If you choose this strategy, you will analyze data from a business's financial statements. In doing so, you may arrive at a valuation (price) of their stock. This will help you figure out whether the stock is a good purchase or not.
Best Investing Strategies: Active Trading
Active trading is hard. Less than 5% of those who try it have any success at it. Less than 1% of traders see stellar returns. But, if you do see these returns, you can make a lot of money.
Most active traders use some form of technical analysis. This research tool focuses on the changes in the price of the stock, rather than in the measurements associated with the underlying business. As such, you can profit from much shorter-term moves. You have the chance to employ leverage with your strategies.
With this trading strategy, you can work on any time frame from months, days, minutes, or even seconds. You use price data from exchange feeds or from charting platforms to see recent price patterns and market trends. You use these to predict future price movements. To bolster your chances, you must set parameters for levels of risk, reward, and win-loss rates.
Technical analysis may be the main tool for active traders, while fundamental analysis may be the main tool for growth investors. But, both camps can make use of both tools from time to time.
You may also employ a slower-paced version of active trading known as momentum investing. The strategy says that even in random price movement, trends emerge. You may make longer-term investments meant to last several months, hoping that momentum will build and the price will continue in the same direction. The idea is to "buy high and sell higher." For instance, a mutual fund manager may seek growth stocks that have shown trends for consistent appreciation in price. They are betting that the rising price trends will continue.
Best Investing Strategies: Value Investing
Mutual fund and ETF investors can employ the fundamental investment strategy or style by using value stock mutual funds. In simple terms, if you're a value investor, you're looking for stocks selling at a "discount." You want to find a bargain.
Rather than spending the time to search for value stocks, you can buy index funds, exchange-traded funds (ETFs), or actively-managed funds that hold value stocks. But, these securities still have similar risks as value stocks. So, do your homework.
Best Investing Strategies: Buy and Hold
Buy and hold investors believe "time in the market" is better than "timing the market." If you use this strategy, you will buy securities and hold them for long periods of time. The idea is that long-term returns can overcome short-term volatility. This strategy is the opposite of market timing.
The buy and hold investor will argue that holding for longer periods requires less frequent trading. Trading costs are minimized. This will increase the overall net return of the portfolio.
Portfolios using the buy and hold strategy have been called lazy portfolios. This is because of their passive nature.
1. Core and Satellite
Core and satellite is a common portfolio design. It consists of a "core," such as a large-cap stock index mutual fund. This core represents the largest part of the portfolio. Other types of funds—the "satellite" funds—each consist of smaller parts to create the whole.
The main goal of this design is to reduce risk through diversification while beating a standard benchmark, such as the S&P 500 Index. This type of portfolio will hopefully achieve above-average returns with below-average risk.
2. The Dave Ramsey Portfolio
Talk show host and finance guru Dave Ramsey touts a four mutual fund strategy. Dave's wisdom is in his simplicity. His methods are easy to grasp. However, the wisdom stops there. These four mutual fund types will often find fund overlap. This means there is little diversity. Further, lower-risk assets, such as bonds and cash, are absent from the portfolio.
3. Modern Portfolio Theory
Modern portfolio theory (MPT) is a method where you attempt to take a minimal level of market risk to capture maximum-level returns. If you follow the tenets of MPT, you may use a core and satellite approach, as described above.
Every investor would like to achieve the highest possible return without taking extreme levels of risk. But how can this be done? The short answer is diversification. According to MPT, you can hold an asset type that is high in risk by itself. But, when combined with other investments, the portfolio can be balanced so that its risk is lower than some of the underlying assets.
4. Post-Modern Portfolio Theory (PMPT)
The difference between PMPT and MPT is the way they define risk and build portfolios based upon this risk. MPT sees risk as symmetrical. The portfolio construction is comprised of several diverse investments. These have various risk levels that combine to achieve a reasonable return. It is more a big picture view of risk and returns.
A PMPT investor sees risk as asymmetrical. They do not think of losses as the exact opposite of gains. Each environment is unique and evolving. PMPT sees that investors do not always act rationally. PMPT accounts for the behavioral aspects of the investor herd, not just the model that MPT follows.
5. Tactical Asset Allocation
Tactical asset allocation is a combo of many of the styles talked about here. It is a style where the three main asset classes (stocks, bonds, and cash) are actively balanced to maximize returns and minimize risk compared to a benchmark, such as an index. This style differs from those of technical analysis and fundamental analysis. It focuses mainly on asset allocation and then on investment selection.
Choosing an investment style is no different than choosing investments. Each investor is unique. The best strategy is the one that works best for your objectives and tolerance for risk.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.