All investing strategies have one goal in common: maximizing returns while minimizing risk. The best strategies should help you meet your financial goals and grow your wealth while maintaining a level of risk that lets you sleep at night. The investment strategy you choose may influence everything from what types of assets you have to how you approach buying and selling those assets.
The best investment strategies increase the money investors make and decrease exposure to risk.
The best investing strategy for you will vary depending on how long you want to invest your money, how involved you want to be in choosing individual investments and how much tolerance for risk you have.
Many investors combine multiple strategies to find the best personalized strategy. For example, investors can have both growth and value stocks in their portfolios.
Popular investment strategies
There are numerous ways to approach investing, but here are some of the more popular investing strategies to get you started.
It’s always nice when things have a clear label, and you can’t get much clearer than “buy-and-hold.” Buy-and-hold strategists seek investments they believe will perform well over many years. The idea is to not get rattled when the market dips — or even drops — in the short term, but to hold onto your investments and stay the course. Granted, buy-and-hold only works if investors still believe in their investment’s long-term potential through those short-term dips.
This strategy requires investors to carefully evaluate their investments — whether they are broad index funds or a rising young stock — for their long-term growth prospects. But once this initial work is done, holding investments saves time you would have spent trading, and often beats the returns of more-active trading strategies.
» Want to know more? Learn about the buy-and-hold investment strategy
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Growth investing involves buying shares of emerging companies that appear poised to grow at an above-average pace in the future. Companies like this often offer a unique product or service that competitors can't easily duplicate. While growth stocks are far from a sure thing, their allure is that they can grow in value much faster than established stocks if the underlying business takes off.
New technologies often fall into this category. For example, if someone believes that home buyers are going to shift increasingly from banks to online mortgage lenders with a streamlined application process, they might invest in the lender that they believe will become dominant in that market.
» Research investments: Read our review of Morningstar
Made famous by illustrious investors like Warren Buffett, value investing is the bargain shopping of investment strategies. By purchasing what they believe to be undervalued stocks with strong long-term prospects, value investors aim to reap the rewards when the companies achieve their true potential in the years ahead. Value investing usually requires a pretty active hand, someone who is willing to watch the market and news for clues on which stocks are undervalued at any given time.
Think about it like this: A value investor might scoop up shares of a historically successful car company when its stock price drops following the release of an awful new model, so long as the investor feels the new model was a fluke and that the company will bounce back over time.
» Grow your investment. Learn about growth and value investing
These strategies do not necessarily stand alone: You can combine aspects of some or all of them to come up with the perfect investing strategy for you. For example, you can certainly buy and hold growth stocks.
» Want to build an ethical portfolio? Learn about socially responsible investing.
The building blocks of investment strategies
To invest, you’ll need to open an account, which you can think of as your investment’s home. That might be an employer-sponsored retirement account, such as a 401(k), or an IRA or a taxable brokerage account — or even a combination of accounts, depending on your strategy and options. What you invest in, such as stocks or bonds, are like the home’s occupants: They live in that house as long as they continue to serve your goals.
Stocks are small pieces of a company that investors buy in the hopes that the company will succeed and its stock, or share, value will go up. Stocks give companies the opportunity to raise money to support their businesses, and they give investors the ability to increase their wealth (provided the stock’s price indeed rises).
Individual stocks (remember, they’re pieces of a business) can also fall in value, just as businesses do. But if you invest in a stock mutual fund — essentially a basket of individual stocks — you’re purchasing not a single stock but many. Holding a variety of companies, particularly if those companies represent different industries, sizes and geographies, can be less risky than investing in a single company.
If you're investing for the long term and you can stomach some short-term volatility, allocating a good portion of your portfolio to stocks makes sense.
» Want to know more? Read about how to invest in stocks
Bonds are loans made by an investor to a company or government that are paid back with interest over time. Bonds pay out interest, but their returns are usually lower than that of the broader stock market over the long term. Bonds are typically more stable than stocks, and most well-balanced portfolios have some bond holdings. There are many types of bonds, and they range in terms of how much interest they pay and how risky they are.
» Need more info? Read about how to invest in bonds
As noted above, mutual funds are investments that package multiple individual investments (often stocks or bonds) into a single offering. While investors don’t directly own the underlying assets themselves, they do share in the ups and downs of the mutual fund’s value. If you pick the right mutual fund, you can end up with a nicely diversified asset.
Actively managed mutual funds have fund managers that execute the fund's strategy, while index mutual funds are built to follow an index, or a portion of the stock market. Some mutual funds have high expense ratios or high minimum investments (or both). But investors can often avoid high expense ratios by comparison shopping among funds, or by favoring index funds, which tend to offer lower expense ratios than actively managed funds. They can also sometimes bypass high minimums by arranging a direct deposit into the fund.
» The feeling is mutual. Read about how to invest in mutual funds
Principles of investment strategies
Whatever investment strategy you choose, it’s important to consider your investing goals. Where your investment style will fall in the following categories depends on many factors: Everything from your age to your finances and even your comfort level doing it yourself will help determine what your portfolio will look like.
Long-term goals versus short-term goals
When investing for long-term goals — those five years or more in the future — it often makes sense to choose higher-yielding (but more volatile) instruments like stocks and stock funds. But there are smart ways to pursue short-term savings goals, too. If you’re saving for a down payment on a house, you may want to place those savings in a more stable environment, like CDs or a high-yield savings account. Since you have a shorter time frame for your money to grow with a goal like this, there is less time to weather the volatility of the stock market.
» Saving for the short term? Read about the best short-term investment accounts
Long-term savings goals, such as retirement, can handle the fluctuations of the market. Since those investments will be in the market for longer — provided the investor can stay the course when there are major changes in the short term — there is less need to worry about those shorter-term dips. These long-term investments are better served by a mix of stocks and bonds or stock mutual funds.
Active versus passive investing strategy
Whether you prefer an active or passive investment strategy boils down to choice. How involved do you want to be in the investing process? How much do you already know about investing? Beginner investors may prefer to hand their savings off to a robo-advisor — an automated, low-cost investing service — rather than take on the challenge of making all the choices themselves.
» Ready to get hands-off? Here is a roundup of the top robo-advisors
More advanced investors or avid DIYers might opt to take a more active role, whether that means trading every day or just keeping tabs on their portfolios. Active investing is a lot of work and may not give you higher returns than passive investing strategies. In fact, those returns can often be lower.
Low-risk versus high-risk investing strategy
Investment strategies always come with some amount of risk, and in almost every way risk and reward are linked. Investors who pursue higher rewards are usually taking bigger risks. For example, a bank CD is insured by the Federal Deposit Insurance Corp. and has virtually no risk. It also pays very little in return. A young tech startup’s stock, on the other hand, is likely high-risk, but there is a chance that it could explode in value.
There are many shades of risk in between, but whatever path you choose, make sure you’re prepared to deal with them.
Getting started with your investment strategy
If you’re not yet investing, there are some simple steps you can take to begin. If you have a 401(k) through your employer, make sure you’re enrolled and investing at least enough of your salary to receive any company match; then choose investments that are aligned with your goals. You should know that most 401(k)s offer relatively few investment choices, so the options for strategy within those vehicles are usually limited.