Before you start investing, it’s always good to understand your financial situation first. The best investment strategy will be the one that will meet your financial goals and create wealth while keeping you comfortable with your level of risk that allows you to sleep at night.
I do all my investing myself because I know how to control my emotions with investing. For most investors, people make poor investment decisions because they get emotional. If you think this is you, then you should look at working with a financial advisor. Financial advisors will help you control your emotions so you can generate solid returns.
Key Rules of Thumb
- Don’t invest in things you don’t understand.
- Have long-term investing strategies (Over 10+ years). Invest in stocks, ETFs, mutual funds, REITs, etc. The longer the investment horizon, the more you can invest in stocks.
- Short-term investing strategies. Don’t put most of the funds in equities. Put it in bond funds and CDs. 60% bonds, 40% equities.
- Never invest in a product or instrument from someone you just met.
- Getting double-digit returns is very hard. If someone promises you this, they are full of themselves. If a return higher than the average market rate, between 6% – 10%, then it’s too good to be true. No one can guarantee a certain return and over 90% of investors don’t beat the stock market return.
- There is no secret from the super-wealthy. If anyone is offering you this product, ignore it. They are taking advantage of you.
Invest in what you Understand
If you don’t understand a company’ business model or how it makes money, then why are you investing in it? Unless you understand the company’s products, market, and competition, then you have a high chance you won’t understand what you’re investing in and the risks associated. This is not an investment strategy but will serve to your advantage when buying stocks.
Dollar-Cost Averaging
Dollar-cost averaging is when the total about you invest is purchased over a set period to reduce the price volatility In your portfolio. A good example is you invest $100 every month, no matter the price. The table below breaks down the dollar cost averaging over a year.
Growth Investing
Growth investing is a strategy that focuses on capital appreciation. The investor buys stocks that have the potential to increase over time, ie a $50 stock will be worth $500 in 5 years. Investors in growth stock believe the company is still expanding and growing its market share. Typically growth stocks do not pay dividends since they use the excess cash to reinvest in its business.
Value Investing
Most of the world’s famous investors are value investors. Value investing is a strategy that focuses on that are undervalued in the market today, ie a $50 stock that should be worth $75 today. Investors in value stocks believe the company is being valued lower than its current growth trends. A lot of value stocks tend to pay a dividend since they are mature, well-established companies.
Income Investing
Income investing focuses on generating a constant, steady stream income. Income investments can come in a few forms such as stocks that pay dividends, bonds, or REITs. All three of these investments pay out cash consistently for the trade-off of minimal growth.
Social Responsible Investing
Environmental, Social, and Governance (ESG) investing fosses in sustainable investing. This type of investing seeks to generate positive returns while positively impacting society and the environment. This can encompass investing in renewable energy companies and avoid fossil fuels, or companies that do business in certain counties, or business that lack the proper diversification within its management team.
Diversify
There is no simple route in picking an investing strategy. Ultimately, you should end up diversify the type of investments in your portfolio as this can help you manage your risk and reduce the volatility of your portfolio. The investment strategy that is best for you is the one that will meet your personal and financial goals while keeping you comfortable and stress-free.