Three Different Investing Strategies That Work

There are countless ways to invest your hard-earned money, with more being invented daily. The good news is that you can still build your financial future using time-tested investing strategies. In this article, we will review three different investing strategies that have been proven to work: Index investing, Growth investing, and Value investing.

We will also cover some basic investing tips that work with any investing strategy, such as taking advantage of tax-advantaged investing opportunities, dollar-cost averaging, and the benefit of a buy-and-hold strategy.

Before You Start…

Your first step before choosing an investment strategy is to consider your tax-advantaged investment options. Many employers that offer 401(k) retirement plans also match employee contributions up to a certain amount. There is no reason to pass up that free money.

Another tax-advantaged investment option is opening an IRA. Many investors have both a 401(k) and an IRA. The type of IRA one opens can depend on your retirement strategy. Contributions to a regular IRA are made from pre-tax earnings, reducing your taxable income and therefore the amount of income tax you pay each year. The downside is that disbursements are taxable. Contributions made to a Roth IRA are made with after-tax dollars. In return, disbursements are not taxable.

1: Index Investing

Index investing has become the go-to investment strategy for millions of investors. Holding index funds appeals to people who want a passive portfolio that they don’t have to worry about. Broad-based Index funds like those that track the S&P 500 are automatically diversified across different sectors.

Index funds don’t need managers to actively buy and sell stocks, so their fees are lower. The average index fund charges 0.06% in fees, compared to the 0.47% charged by the average active fund. If you believe that no one can consistently beat the market, then index funds (which track the market) might be the best choice to fit your investment strategy.

One twist to passive investing is the “Index +” approach, where you supplement your index fund with a second, more focused fund or hold small positions in individual stocks that you believe will outperform the market.

2: Growth Investing

Growth investing is one of the most popular investment strategies. It focuses on investing in companies whose share prices are expected to grow faster than average. Growth investing focuses on rapidly growing companies, usually in whatever the “hot” sector is at the time. While growth investing can offer higher returns than index or value investing, it comes with higher risk.

Growth investing requires the most active management of the three successful investment strategies covered in this article. Growth investors need to keep abreast of financial and business news that might affect their holdings, especially each company’s earnings reports. They can avoid the time and labor involved in tracking growth stocks by investing in an actively-managed fund comprised of growth stocks, but will incur management fees in return.

3: Value Investing

Value investing is a long-term strategy based on searching for undervalued companies and holding their stock until it rises to meet the company’s intrinsic value. Value investors watch for stocks that have fallen too far below fair value on bad news, for example. Value investing usually sees less volatility than growth investing but typically has less of a chance for out-sized returns.

Finding undervalued stocks requires a detailed financial analysis of a company, such as comparing the stock price to book value and examining free cash flow against those of competitors. Benjamin Graham, the father of value investing, had a famous rule of thumb that recommended only buying stocks that were trading at two-thirds or less of their intrinsic value.

The world’s most famous value investor is Warren Buffett, who stresses a buy-and-hold philosophy and to only invest in stocks and industries you understand.

Investments should not be impulse purchases

Enhancing Your Investment Strategy

No matter which investment strategy you choose, these practices will help you more fully realize your profit potential.

Dollar-Cost Averaging

Dollar-cost averaging is the strategy of investing a fixed dollar amount on a set schedule, regardless of the price of the stocks you own. Dollar-cost averaging has the potential to lower the average cost per share of your investment. When share prices rise, your regular investment amount buys fewer shares, but when share prices fall, you end up buying more than the usual number of shares for the same investment amount. You bring down the average price per share by purchasing fewer shares when they are expensive and more when they’re cheaper.

By setting a regular schedule and amount to invest, you can treat stock purchases as a recurring expense, the same as a monthly bill to be paid. This reduces stress and helps you resist trying to time the market.

You can reinforce your self-control by setting up automated payments into your brokerage account and using the funds to make your regular purchase later. Dollar-cost averaging is easier than ever now that brokers allow the sale and purchase of fractional shares of stock.

Buy and Hold

A buy-and-hold strategy is more suited to value and index investing but also has something to offer growth investment strategies. Committing to a buy-and-hold strategy can help you resist the urge to bounce in and out of investment positions, which can increase your tax burden.

By holding a stock for more than a year, you will only be charged the long-term capital gains rate on your profits. This can range from 0% to 15%, to 20%, depending on your annual ordinary income. Profits realized from the sale of stock held less than one year is taxed according to your usual tax bracket.

It Doesn’t Have To Be Rocket Science

Investing can be as simple or as complicated as you want. If you don’t want or can’t afford the time required to research individual stocks, you can opt for the “fire and forget” approach of investing in an index fund with your 401(k) or IRA. If you have nerves of steel and an iron will, you can try your hand at day trading.

Regardless, the more you want to trade, the more information and expertise you need to succeed. Take advantage of Verified Investing’s YouTube channel, which is home to market news and regular informational investing shows