When you start investing on your own, the investment world may seem very vast, and often it is. However, you can simplify things by using some tried-and-true strategies. These popular investment options can help you achieve a variety of financial goals and pave the way for lifelong financial stability.
Best Investment Strategies for Beginners
A good investment strategy aims to minimize risks and achieve the maximum potential returns. But with any strategy, it is important to remember that you may lose money in the short term if you are investing in market-linked securities like stocks and bonds. Typically, a good investment strategy takes time to work and should not be regarded as a “get-rich-quick scheme.” Therefore, it is essential to start investing with realistic expectations about what you can and cannot achieve.
1. Buy and Hold
The buy-and-hold strategy is a classic strategy that has proven its worth time and again. With this strategy, you do exactly what the name suggests: you buy an investment and then hold it indefinitely. Ideally, you won’t sell the investment, but you should aim to own it for at least 3 to 5 years.
Advantages: The buy-and-hold strategy focuses on the long term and thinking like an owner, thus avoiding the active trading that affects the returns of most investors. Your success hinges on the performance of the underlying business over time. Thus, you can ultimately find the biggest winners in the stock market and potentially achieve hundreds of times your original investment.
The beauty of this approach is that if you commit to never selling, you never have to think about it again. If you never sell, you will avoid capital gains taxes, which reduce returns. The long-term buy-and-hold strategy means you aren’t always focused on the market – unlike traders – so you can spend your time doing things you love instead of being tied up watching the market all day.
Risks: To succeed with this strategy, you will need to resist the urge to sell when the market gets tough. You will have to endure sharp market declines, which can drop 50 percent or more, and individual stocks may drop even further. This is easier said than done.
2. Buying Index Funds
This strategy relies on finding a good market index and then buying an index investment fund based on it. Two popular indices are the S&P 500 Index and the Nasdaq Composite Index. Each contains many of the best stocks in the market, giving you a diverse range of investments, even if it’s the only investment you own. (This list of top index funds can help you get started.) Instead of trying to beat the market, you simply own the market through the fund and reap its returns.
Advantages: Buying an index fund is a straightforward approach that can pay off, especially when combined with a buy-and-hold mentality. Your returns will be the weighted average of the assets in the index. With a diversified portfolio, you will have less risk than if you were investing in just a few stocks. Additionally, you won’t need to analyze individual stocks to invest in, so it requires less work, allowing you time to spend on other enjoyable activities while your money works for you.
Risks: Investing in stocks can be risky, but owning a diversified portfolio of stocks is a safer way to do it. However, if you want to achieve market returns in the long term – an average of 10 percent annually for the S&P 500 index – you will need to stick through tough times and not sell. Also, since you are buying a collection of stocks, you will get an average return for them, not the return of the most famous stocks. Nevertheless, most investors, even professionals, struggle to outperform the indices over time.
3.
Index and Some Stocks
The “Index and Some Stocks” strategy is a way to use an index fund strategy and then add a few small positions to the portfolio. For example, you might have 94 percent of your money in index funds and 3 percent each in Apple and Amazon if you believe those companies are well-positioned for the long term. This is a good way for beginners to stick with a primarily lower-risk index strategy while adding a bit of exposure to individual stocks they like.
Advantages: This strategy takes the best of the index fund strategy – lower risk, less work, potentially good returns – and allows aspiring investors to add some positions. Individual positions can help beginners enjoy analyzing stocks and investing in them, without costing too much if those investments do not succeed.
Risks: As long as individual positions remain a relatively small percentage of the portfolio, the risks here are mostly the same as the risks associated with buying the index. You will likely still get an average market return unless you own a lot of good or bad individual stocks. Of course, if you plan to take positions in individual stocks, you will want to put time and effort into understanding how to analyze them before investing. Otherwise, your portfolio could be at risk of losses.
4. Income Investing
Income investing means owning investments that produce cash payments, typically dividend-paying stocks and bonds. Part of your return comes in the form of hard cash, which you can use for anything you like, or you can reinvest the payments in more stocks and bonds. If you own dividend-paying stocks, you may also enjoy the benefits of capital appreciation in addition to cash income. (Here are some high-yield ETFs and stocks you might want to consider.)
Advantages: You can implement an income investing strategy using index funds or other income-focused funds, so you do not need to choose individual stocks and bonds here. Income investments tend to be less volatile than other types of investments, and you have the regular cash security from your investments. Additionally, high-dividend stocks tend to increase their payouts over time, raising the amount you receive without any extra work on your part – making dividend investing one of the best strategies for passive income.
Risks: Although they are less risky than stocks in general, dividend stocks are still stocks, so they can decline as well. If you invest in individual stocks, dividends can be cut, even to zero, leaving you without cash payment and capital loss. Bond yields are not always attractive and can be low enough that they do not keep pace with inflation, leaving investors with reduced purchasing power. Also, if you own bonds and dividend-paying stocks in a regular brokerage account, you will have to pay taxes on the income, so you might want to hold these assets in a retirement account like an IRA.
5. Dollar-Cost Averaging
Dollar-cost averaging is the practice of adding money to your investments regularly. For example, you might set that you can invest $500 each month. So every month, you put $500 to work, regardless of what the market is doing. Or perhaps you add $125 each week instead. By buying an investment regularly, you spread out your purchase price points.
Advantages: By spreading out your purchase points, you avoid the risks of “market timing,” which is the risk of putting all your money in at one time. Dollar-cost averaging means you will get an average purchase price over time, ensuring you do not buy at too high a price. Dollar-cost averaging is also good for helping you establish a regular investing habit. Over time, you are likely to end up with a larger portfolio, even if you are sticking to your approach.
Risks:
Although the dollar-cost averaging method helps you avoid investing at the wrong time, it also means that you won’t be investing at the exact right time. Thus, you are unlikely to achieve the highest possible returns on your investment.
How to Start Investing
Investing is a vast world, and new investors have a lot to learn to get up to speed. The good news is that beginners can make investing relatively simple by using some basic steps while leaving all the complicated matters to the professionals.
Bankrate offers several resources for new investors:
- Course: How to Invest for Beginners (after free registration)
- How to Invest in Stocks
- Comprehensive Reviews of Major Online Brokers
- Best Investment Books for Beginners
The above links will kickstart your investment journey. You’ll access educational content and research on stocks and ETFs, as well as detailed instructions on how to execute trades and leverage your broker’s capabilities. Most major online brokers have no minimum account size, so you can get started quickly—even today, if you just want to browse.
Conclusion
Investing can be one of the best decisions you can make for yourself, but getting started can be tough. You can simplify the process by choosing a popular investment strategy that works for you and then committing to it. As you become more knowledgeable about investing, you can then expand your strategies and types of investments you can make.
Note: Brian Baker from Bankrate contributed to this story update.
Editorial Disclaimer: All investors are advised to conduct their independent research on investment strategies before making an investment decision. Additionally, investors are advised that past performance of investment products does not guarantee their future increases in value.
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