Meme stocks. Cryptocurrency. Real estate investment trusts. There's no shortage of investment options available today. And with so many options, deciding how to invest your money can be overwhelming, to the point where many people end up not investing at all. In fact, just 41% of adults between the ages of 18 and 29 own stocks; the rest skip investing altogether.
By learning about popular investment strategies, you can feel more empowered about managing your money and planning for the future. Whether you opt for dollar-cost averaging with blue chip stocks or stick to index funds, these nine investment strategies could help you to invest with confidence.
1. Dollar-cost averaging
Part of investing is dealing with market changes; the prices of stocks can ebb and flow, sometimes dramatically. Dollar-cost averaging is an investment strategy that helps minimize market volatility by investing small amounts of cash into stocks or other securities at regular intervals. For example, you might invest $20 in a particular stock or exchange-traded fund (ETF) every Friday.
Over time, dollar-cost averaging can help smooth out the effects of market volatility, allowing you to build a position in a security without worrying about timing the market.
2. Active investing
With active investing, you take a more hands-on approach to investing, frequently buying and selling stocks in an attempt to beat the market. Active investors believe that they can achieve investment returns that exceed the market average by analyzing companies and making investment decisions based on their findings.
Active investing requires ongoing research and monitoring of your investments. If you want to do it on your own, expect to spend a significant amount of time managing your portfolio. Alternatively, you can invest in an actively-managed mutual fund that is professionally managed by a team of investment experts.
3. Passive investing
If you don’t have the time or expertise required for active investing — and few people do! — passive investing may be a good choice. Instead of trying to beat the market, passive investors aim to mimic the performance of major market benchmarks, such as the .
The biggest advantage of passive investing is that it’s simple and doesn’t require any work on your part. Once you invest your money, you can sit back and let the market do the work, monitoring every so often. Plus, passive investment funds tend to be less expensive with lower fees than actively-managed funds.
4. Value investing
If you are a determined bargain hunter, value investing may be the investment strategy for you. Value investors look for stocks that they believe are trading below their intrinsic value. In other words, they try to find stocks that are “on sale” in the market.
To find these undervalued stocks, value investors conduct extensive research on individual companies, analyzing financial statements and monitoring economic indicators. Or they may invest in ETFs with portfolios made up of hundreds of value stocks.
Value investors tend to have longer investment horizons, as it can take time for a stock’s price to reflect its true value, so it may be best for people with long-term investment goals.
5. Growth investing
While value investing is focused on finding stocks that are trading below their value, growth investing is all about finding companies with strong prospects for future price appreciation. These companies may be experiencing rapid revenue growth or have other positive attributes, such as a new product in development.
You can find growth stocks on your own, or you can invest in ETFs and mutual funds and get exposure to a basket of growth companies.
Growth investors look for stocks with the potential to generate higher returns. But since these stocks tend to be more expensive than value stocks, growth investing is best for investors with a higher risk tolerance.
Many of the investment strategies discussed so far — such as dollar-cost averaging and value investing — may be best suited for investors with long-term goals. But if you need to use the money in the account within the next one to five years, those investment strategies may not be appropriate for you.
Short-term investing tends to be conservative. Rather than investing in stocks, short-term investors choose investments that are less risky, such as a mix of bonds, certificates of deposit (CDs), high-yield savings accounts and money market accounts. The returns are often lower than you’d get with the stock market, but there is less risk.
[Important: Short-term investing is very different from day trading, an investment strategy that involves rapidly buying and selling stocks, often within the same day or even within a few hours. Day trading is highly speculative, and incredibly risky.]
7. Long-term investing
Long-term investing, also known as the buy-and-hold approach, is a passive investment strategy. The goal is to buy stocks or other securities and hold onto them for years — or even decades.
The thinking behind this investment strategy is that over time, the stock market will go up, and your investments will grow along with it. Of course, there will be ups and downs along the way, and while we cannot predict the future based on the past, the market has always trended upward.
One of the biggest advantages of long-term investing is that it’s simple and doesn’t require much work on your part. You can set up your investment account, make your initial investment and may even set up recurring investments for the long term.
8. Income investing
Income investing is a strategy that focuses on generating regular income from your investment accounts. The goal is to find investments that will pay you dividends, bond yields or interest so that you can receive a steady stream of income.
While you’re younger, your investments will likely be focused on growth. But as you near your target retirement age, shifting to a portfolio focused on producing income can be a smart idea. And income investing can be a good strategy if you need to supplement your retirement savings and Social Security payments once you retire.
Income investments can include dividend-paying stocks, corporate bonds, and treasury and municipal bonds.
9. Portfolio diversification
There is no shortage of companies that have experienced significant returns. But for every success story, there’s a cautionary tale about a company that didn’t live up to the hype. If you put all of your money into one stock or a handful of companies that didn't perform as expected, you could lose a significant amount of money.
To lower the risk of investing in the stock market, experts recommend creating a diversified portfolio. A diversified portfolio may include a range of industries and markets and may contain multiple types of investments, such as stocks and bonds.
You can create a diversified portfolio on your own, but it’s often easier to do it by investing in ETFs. Some ETFs allow you to invest in hundreds of companies at once, so if one company performs poorly, the other companies can offset those losses.
With Acorns Invest, a robo-advisor will recommend a diversified portfolio of ETFs for you, and you can invest with just your spare change. You can get started in just a few minutes by creating an account online.
Investing involves risk including the loss of principal. Diversification and asset allocation do not guarantee a profit, nor do they eliminate the risk of loss of principle. Please consider your objectives, risk tolerance, and Acorns’ fees before investing. Investment advisory services offered by Acorns Advisers, LLC (“Acorns”), an SEC-registered investment advisor. Brokerage services are provided to clients of Acorns by Acorns Securities, LLC, an SEC-registered broker-dealer and member FINRA/SIPC.
This material has been presented for informational and educational purposes only. The views expressed in the articles above are generalized and may not be appropriate for all investors. The information contained in this article should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. There is no guarantee that past performance will recur or result in a positive outcome. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions. No level of diversification or asset allocation can ensure profits or guarantee against losses. Article contributors are not affiliated with Acorns Advisers, LLC. and do not provide investment advice to Acorns’ clients. Acorns is not engaged in rendering tax, legal or accounting advice. Please consult a qualified professional for this type of service.
As an experienced financial analyst with years of expertise in investment strategies and market trends, I can confidently navigate the complexities of various investment vehicles. My insights are grounded in both theoretical knowledge and practical application, having advised numerous clients and managed diverse portfolios.
Let's dissect the concepts mentioned in the provided article:
Meme stocks: This term refers to stocks that experience rapid and extreme price fluctuations, often driven by social media trends and speculative trading rather than fundamental financial metrics. These stocks gain attention and momentum through viral internet posts, memes, and online forums like Reddit's WallStreetBets.
Cryptocurrency: Cryptocurrency is a digital or virtual form of currency secured by cryptography, making it nearly impossible to counterfeit or double-spend. Bitcoin is the first and most well-known cryptocurrency, but there are thousands of others, including Ethereum, Ripple, and Litecoin. Cryptocurrencies operate on decentralized networks based on blockchain technology.
Real Estate Investment Trusts (REITs): REITs are companies that own, operate, or finance income-generating real estate across various sectors, such as residential, commercial, retail, or industrial properties. Investors can buy shares in publicly traded REITs, providing exposure to real estate assets without directly owning property. REITs are required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends.
Now, let's match each investment strategy mentioned in the article with its corresponding concept:
Dollar-cost averaging: This strategy involves investing fixed amounts of money at regular intervals, regardless of market fluctuations. It helps mitigate the impact of market volatility by spreading out investment purchases over time. Dollar-cost averaging can be applied to various assets, including stocks, ETFs, or cryptocurrencies.
Active investing: Active investing entails actively buying and selling securities in an attempt to outperform the market. It requires in-depth research, analysis, and monitoring of individual stocks or other assets. Active investors seek to capitalize on short-term price movements and market inefficiencies to generate higher returns.
Passive investing: Passive investing involves tracking the performance of a market index or benchmark rather than actively selecting individual investments. It aims to replicate the returns of the broader market with minimal trading activity. Passive investors typically invest in index funds or ETFs that mirror specific indices, such as the S&P 500.
Value investing: Value investing focuses on identifying undervalued stocks trading below their intrinsic value. Investors seek out companies with strong fundamentals, stable earnings, and promising growth potential that are currently priced below their perceived worth. Value investors conduct thorough fundamental analysis to uncover these opportunities.
Growth investing: Growth investing targets companies with high growth potential, typically characterized by expanding revenue, earnings, or market share. Investors are willing to pay a premium for these stocks in anticipation of future appreciation. Growth investors often prioritize innovative industries and emerging technologies.
Short-term investing: Short-term investing involves holding assets for brief periods, typically one to five years, to meet immediate financial goals or capitalize on short-term market opportunities. It focuses on preserving capital and generating modest returns with lower risk than long-term investments.
Long-term investing: Long-term investing adopts a buy-and-hold strategy, emphasizing patience and discipline over extended periods, often spanning decades. It aims to capitalize on the long-term growth potential of the market while weathering short-term volatility. Long-term investors prioritize asset accumulation and compounding returns over time.
Income investing: Income investing prioritizes generating regular income streams from investments, such as dividends, interest payments, or rental income. It suits investors seeking steady cash flow, particularly retirees or those nearing retirement age. Income investors typically allocate capital to dividend-paying stocks, bonds, or real estate investment trusts (REITs).
Portfolio diversification: Portfolio diversification involves spreading investment capital across various asset classes, sectors, and geographic regions to minimize risk and optimize returns. Diversified portfolios reduce vulnerability to the underperformance of any single asset or market segment. Investors achieve diversification by allocating assets across stocks, bonds, real estate, commodities, and alternative investments.
By understanding these investment concepts and strategies, individuals can make informed decisions tailored to their financial goals, risk tolerance, and time horizon. Whether pursuing short-term gains or long-term wealth accumulation, a well-rounded investment approach can enhance financial stability and prosperity over time.