Strategies for Investment Success
Create a profitable portfolio with these solid investment strategies .
Laura Adams, MBA
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Strategies for Investment Success
This episode is about investment strategies that can help you select a successful portfolio.
I’ve received several emails from intelligent young listeners who want to know more about the basics of investing, especially when it comes to stocks. I applaud your enthusiasm for building wealth! This show will introduce you to basic investment strategies and will be a good review for the more experienced investors who are listening. Next week, I’ll go a little more in depth by discussing Exchange Traded Funds (ETFs) and whether or not they represent a good investment strategy.
Passive vs. Active Investing
There are two major camps of investment philosophies, passive strategies and active strategies. Investors on the passive side generally believe that it’s best to purchase a good investment and keep it for the long term. This is often called a buy-and-hold strategy. The idea is that fewer transactions of buying and selling minimize costs. A buy-and-hold strategy is also supported by the concept that over longer periods of time investing in stocks can provide higher returns despite market volatility.
Active investment strategies, on the other hand, aim to maximize return despite transaction costs. Active investors believe they can achieve higher returns by timing the stock market. This means buying low and selling high over shorter periods of time. Active investors watch the market carefully and make decisions based on current events or from charting patterns of a stock’s performance.
Neither strategy is inherently right or wrong, but should be adopted based on one’s level of knowledge, investing experience, and tolerance for risk.
It’s A Bear Out There
With our current economic conditions, preserving and building wealth is simply more challenging for all types of investors. We’re going to have to work harder at investing than we’ve had to for a long time! During a bull market, when the stock market is trending up, average investors can afford to be a bit complacent about their portfolio because they’re generally doing well. A rising tide lifts all boats, right?
Those good old investing days will return. But for now, many are taking on a new attitude that includes being more picky and cautious about their investment choices. Bear markets make us take a hard look at where we should invest. I wish I could tell you that stock A or bond B is the right place to find the highest return for your money. But the challenge and fun of investing is that there’s never an absolute right or wrong choice. However, there are three broad methods that can help guide you down a successful investment path. These methods involve investing for growth, value, or income.
Investing for Growth
Growth investing is the most popular strategy when financial markets are trending up. This is because many companies have the opportunity to grow their business when economic times are good. Investing for growth means an investor buys the stock of a young company that they believe has potential to take huge market share in their industry. These are the stars of the future … think Google before most of us knew what Googling was! Growth companies are the opposite of established and well-known “blue chip” companies. They’re smart and successful, but still struggling to dominate, and therefore experience fluctuations in profits and stock price. The idea is to buy in at a low stock price before the company goes gangbusters. Then you’ll get to reap big profits as the stock price skyrockets.
In challenging economic times, investing for growth is more difficult. This is because many companies can’t grow; they’re simply fighting for their survival. Here’s a tip for investing for growth in a down market like we’re experiencing today: choose promising companies in industries that are growing. For example, biotechnology is one sector with companies that are still maintaining healthy rates of growth.
Investing for Value
A popular strategy for our current market conditions is value investing. This entails sniffing out good companies that are undervalued because they’ve been overlooked. The investment mogul Warren Buffet has built an empire on buying stock of superior companies at low prices. It’s like finding an expensive pair of shoes you love in just your size on the 75% off rack! Even if they’re still expensive on sale, the price is relatively low when compared to full retail. Value stocks can be bargains for many reasons, but not because the company is performing poorly. The price should be low relative to the value of the company. Consider doing some research on a site such as msn.money.com for recommended value investments.
Investing for Income
The last strategy is income investing. Income stocks are those that pay out quarterly dividends to shareholders. This is typically only possible for large and well-established companies like Johnson & Johnson or DuPont, for example. But you can find more income stocks on a site such as morningstar.com. Dividends are proof that a company is performing well, because those funds come from excess profit that’s left over after a company has paid all their expenses. Investors looking for the reassurance of income will target companies that pay out the highest and most consistent dividends. And if their stock price rises, that’s an added bonus.
Most financial advisors recommend owning a diversified portfolio that might include stocks from two or three of these investment categories. If you’re willing to risk a little more in order to obtain higher returns, a portfolio tilted toward growth funds may be suitable for you. And if you’re more conservative with safety as your top priority, investing for income may be appealing. It’s important to always keep your unique goals in mind when choosing investments.
Don’t forget to check out next week’s episode on investing in Exchange Traded Funds (ETFs). If you think an investment advisor would be your best option, refer to this previous episode of Money Girl.
Be sure to check out my Quick Tip on whether or not you can get insurance for your investments.
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Chi-Ching, that’s all for now, courtesy of Money Girl, your guide to a richer life.
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.