Whether you’re new to investing or an experienced trader, using solid investment strategies is the best way to protect your funds. These plans provide a structure to help you grow your savings over the long term.
In this article, we’ll explain a few simple investing strategies and the benefits of implementing them.
Investment strategies balance your long-term savings goals and risk tolerance to help you manage your portfolio. These plans can impact your assets, buying and selling schedules, and tax payments. By aligning your strategies with your financial objectives, you create a disciplined approach to growing and protecting your wealth over time.
Managing money can be complex, but investing strategies simplify this process. Here are the benefits of a clear plan.
Before you buy or sell a single asset, you need a clear, realistic goal. This will tell you how aggressively to invest based on your current age and savings.
Imagine you want to save $1,000,000 by the time you’re 55. If you’re 20 years old, you have more time to accrue funds, so you may be able to opt for more predictable growth methods than if you start at 45.
Tried-and-true investment strategies can stop you from making decisions on a whim and potentially losing more than you earn.
For example, some methods have you invest a little bit of money into a stock market index on a set schedule. You’ll make less when prices are high and more when they’re low, but over time, these variables can average out to create consistent returns. Having this strategy in place can prevent you from selling when the market goes south or buying too much when it rallies.
New investors may be inclined to explore assets they consider exciting rather than ones that will benefit them in the long term. But investing without a solid plan can lead to more losses than gains. Instead, a comprehensive strategy focuses on the big picture, mixing long and short-term investments to build wealth.
Sound investment strategies balance aggressive growth methods with more predictable, balanced returns. With a solid plan in place, you’ll have support if one of your investments doesn’t pan out.
The best examples of investment strategies merge the need for growth with your risk tolerance. Here are five easy-to-follow and effective methods to consider.
Buy-and-hold investing means you buy an asset with the intention of owning it for the long haul. Many investment vehicles lock your funds into an account for a set period, promising to return them later with interest. People often use this strategy to save for retirement or other later-in-life goals, such as buying a house or paying for assisted living.
One example is deferred annuities, which allow you to grow your funds tax deferred. You’ll collect payments years later, and the provider will return your initial contributions alongside any interest you’ve earned.
Passive index funds track the performance of a specific market index, such as the S&P 500® or Nasdaq. They then invest in the same securities as the index to replicate its returns.
For example, the S&P 500® tracks the stock value of the top U.S. companies, such as Apple, Microsoft, and Amazon. In order to access similar returns, the SPY ETF invests in the same accounts as the S&P 500®. This lets investors cheaply invest in the market without having to buy every stock in an index themselves.
Dollar-cost averaging refers to buying specific amounts of an asset at regular intervals over time. For example, you might purchase $100 worth of SPY on the 15th of each month. You’ll earn more in some months than others, which averages out and offers relatively predictable returns. This approach prevents you from losing money while trying to time the stock market perfectly.
Income investing focuses on owning assets that generate consistent cash flow.
One example of this is dividend stocks, which send payouts to stockholders at regular intervals. Many investors reinvest dividends in more of the same stock. These new shares also pay dividends, which you can use to continue buying stock. Over time, this cycle repeats, and your investment grows faster. This strategy takes advantage of compounding, where you earn money on both your original contribution and its gains over time.
You can also use annuities to earn regular income. When you purchase an annuity, you enter into a contract with an insurance company. After your annuity matures, the insurer sends you a series of payments, which can supplement other revenue sources.
Counter to a passive approach, active investing involves selecting investments — most often, stocks — in an attempt to outperform the market. This requires extensive knowledge of the market and investment platforms, so it may not be the right option for everyone. If you go the active route, leaving the details to a professional can make sense, particularly if you’re new to investing.
Following these key investing rules can help keep your funds more secure.
Diversification refers to spreading your investments across multiple asset types. For instance, a portfolio that includes low-cost index ETFs, individual stocks, and income-producing options like annuities covers most bases.
And to avoid concentration risk, aim to own a variety of holdings within one category. For stocks, this could mean owning an S&P 500 ETF, some dividend stocks, and low-priced stocks.
Generally speaking, try to keep no more than 3% of your capital in any one asset. This prevents you from losing large amounts of your savings if a single investment vehicle fails. If you’ve diversified your portfolio properly, you’re likely already following this rule.
Promises of earning large amounts of money in short periods of time, such as a stock that’s predicted to double (or more), should raise red flags. People may be trying to convince you to invest in something so they can take your money and run. Instead, stick to tried-and-true strategies that focus on steady wealth building.
Buy-and-hold investing doesn’t mean you completely set it and forget it. If your stocks start to stagnate and underperform, it may be time to reinvest in a different asset. Diversification helps, as it functions to offset losses in one area of your portfolio with gains in another. But it’s also a good idea to monitor your investments so they don’t fail without you noticing.
To start investing, set your long-term financial goals and decide how long you have to reach them. Then, select appropriate ETFs, stocks, and annuities to create a well-rounded, diversified portfolio that combines growth potential with income production.
Below are the four rules of investing:
1. Focus on achieving diversification across and within asset types.
2. Don’t keep too much money in any one asset.
3. Stay away from lofty, too-good-to-be-true promises.
4. Monitor your investments so you can make adjustments as necessary.
Compound growth refers to earning interest on top of interest. Most accounts compound on a preset schedule.
For example, imagine you have a high-yield savings account with a 4% annual interest rate. In January, you put $1,000 into the account. At the end of January, the $3.27 in interest you earned gets added to the original total, bringing your balance to $1,003.27. Now, you’re earning interest on this larger balance. By the end of the year, your savings account balance will have grown to roughly $1,040, thanks to the power of compounding.
The best investment strategies depend on your needs — common options include buy-and-hold, dollar-cost, and passive index fund investing. But no matter what you pick, diversifying your portfolio can help keep your funds more secure.
This communication is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.
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1 Diversification does not guarantee a profit or protection against a loss in declining markets.
