Written by: Fiona Smith, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.
Do you find investing scary? If you said yes, then I have good news: You’re not alone. Investing may seem complex. But in reality, it isn’t. And in this post, you’ll learn 10 beginner-friendly investment strategies that will help you conquer your investing fears. Let’s dive right in.
What is an Investment Strategy? An investment strategy is a step-by-step plan that clearly outlines how individual investors can accomplish their investment goals. There is no such thing as a “one investment strategy fits all” scenario. In fact, your investment strategy is based on your situation, age, debt, risk tolerance, financial goals, etc.
10 Best Investment Strategies for Beginners
You don’t have to be an experienced investment banker or have a Master’s Degree to become a successful investor. In fact, most beginner investment strategies are also used for ultra-high-net-worth individuals. With that said, let’s kick things off with an investment strategy.
1. Lump Sum Investing
Lump sum investing is when you take a lump sum – or a big chunk of cash ‒ and invest it in the stock market all at once. If you want to increase your chances of profit, then lump sum investing is one of the best investment strategies for beginners. With lump sum investing, you can make a much bigger profit when you invest all of your cash when the market drops. What’s the downside of lump sum investing? You have to remove your emotion. Believe me, it’s not easy to invest when the market is down and the media is calling the next stock market armageddon. In fact, your friends will probably think you’re crazy that you’re investing your money while the market is taking a nose dive. But that’s how you get rich off stocks. This is why you need to have an investment plan in place before the market tanks.
2. Buy and Hold
The buy and hold strategy is one of my favorite investment strategies for beginners ‒ and for advanced investors. In fact, I do this myself. And Warren Buffett is another strong proponent of this investment strategy. How does it work? Simply identify an investment (for example, an individual stock, mutual fund, or ETF), buy it today, and don’t sell it. Those from the crypto world would call this strategy HODLor “Hold On for Dear Life.”
Why does it work? People are emotional. That means people tend to sell their investments when the value is down(which isn’t a good strategy). And people often buy when investments are up (also not good). The buy-and-hold strategy takes the emotion out of the picture since you’re holding on for the long run.
3. Dollar Cost Averaging
Dollar cost averaging (aka DCA) is one of the best investment strategies for beginners because it completely eliminates emotion from investing. How? With DCA, your investment strategy is completely automated. Here’s how it works:
You preselect an investment (like an index fund)
You preselect how many times you want to invest(for example, monthly,bi-monthly, etc.)
You pre-select how much money you want to invest each occurrence (like$100, $50, etc.)
And that’s it. When you determine the investment fund, the amount, and the number of times you invest before you actually invest, life gets much easier. Why? Because your investment strategy is now out of sight and out of mind. In other words, you don’t have to think about investing. You can do things that matter more, like spending time with your family. And the best part? Regardless of whether the markets are up or down, your dollar cost averaging strategy will make sure you’re still investing in the market.
4. Index Investing
What do Warren Buffett and I have in common? We both love index investing. Index investing is when you invest in an index fund. Index funds simply track the stock market – so you’re probably never going to outperform the market with an index fund ‒ but that’s ok. Most investors don’t outperform the markets anyway – at least not over the long term. There are many different indices, like:
The S&P500
The Russell2000
The Dow Jones Industrial Average
I like to keep it simple, which is why I’m a big believer in investing in the S&P500 index fund. If you’re looking for one of the easiest and most straight forward investment strategies for beginners, then index fund investing could be for you.
5. Investing in Retirement Accounts
One of the best places to start investing as a beginner is your retirement account. There are several different retirement accounts, such as:
IRA
401(k)
Roth IRA
The list goes on, but these are the most common types of retirement accounts. And one of the best investment strategies for beginners is to simply start investing your money in a retirement account. Why? Most retirement accounts are tax-advantaged, which means your invested money gets some type of tax preferential treatment.
Here’s a Pro Tip:
If you have access to a 401(k) through your employer AND your employer is making a matching contribution (if you don’t know, then call your HR department), then start investing with your 401(k)account.
6. Active Investing
Active investing could be an investment strategy for beginners, although I don’t recommend it. If you’re interested in the stock market and love tracking the latest stock information from online news sources like Seeking Alpha, then the active investing strategy could be for you.
What is active investing? It’s when you’re day trading. You’re basically in and out of the stock market. Active investing can be stressful and typically, individual investors don’t outperform the market, so I’d stay away from this one for now.
7. Growth Investing
Do you want to be an aggressive investor? Do you have a high tolerance for risk? If that sounds like you, then consider the growth investing strategy. The growth investing strategy is one of the more aggressive investment strategies where you:
Put your money in high-risk investments
Don’t care if you lose money on your investments There are such stocks called growth stocks. Some examples of growth stocks include:
Tesla
Google
Amazon
Many growth stocks can be found in volatile industries like technology. They’re called growth stocks because they have a high potential for growth ‒ but might also fall rapidly in value. The key is to make sure you can stomach the highs and the lows of growth stocks.
8. Value Investing
Value investing is another one of my favorite investment strategies for beginners. Why? Because with value investing, you buy stocks that are undervalued and have MASSIVE future growth potential. Once again, Warren Buffett would agree with me on this. If you’re looking to build out your investment know-how, then the best way to find a value stock is by:
Analyzing the company’s price-to-earnings ratio
Analyzing the company’s market cap
Comparing the company’s stock price to that of its peers
Determining the volatility of that company’s stock
As you can see, there are a lot of analytical factors that go into determining whether a stock is actually a value investment. Not for you?
No problem. There are plenty of people or websites you can follow for more insight like Warren Buffett, Seeking Alpha, the Wall Street Journal, etc.
9. Income Investing
If you’re a big believer in earning dividends, then income investing might be one of the best investment strategies for you. Income investing is when you invest in dividend-generating stocks. You’ll want to invest in companies with stocks that:
Have low volatility
Pay steady dividends
Outperform their peers over time
Regularly increase their dividend payouts
Keep in mind that not every dividend-paying stock is equal. In fact, some failing companies know that dividends attract investors. So, to maintain a surface-level “good” reputation with investors, these failing companies may boost their dividend yields to attract investors. A typical dividend yield from average companies is somewhere between 3% to 4%. So if you spot a company offering a dividend yield of 9% or more… … Be cautious and do some extra research to make sure the company is legit and not failing in the background.
10. Socially Responsible Investing
Socially responsible investing is oftentimes put in the same category as ESG investing. ESG stands for Environmental, Social, and Governance. ESG are 3 factors that many investors following the SRI investment strategy apply as part of their analysis to identify the top SRI stocks. Does SRI outperform the market? Honestly, it’s hard to say.
Sometimes studies have found that SRI actually outperforms the market, while others have shown that it’s either in line with or underperforms markets. The main downsides of SRI and ESG are:
Less diversification
Fees are often higher
ESG ratings are not standardized
Some companies may be ranked as ESG/SRI yet you might disagree with a company’s policies
While socially responsible investing can certainly be one of the top investment strategies for beginners, I would probably recommend first investing in index funds. Once you become more comfortable with investing, then you can always consider shifting your money into SRI/ESG initiatives.
Principles of Investment Strategies
While it’s important to know the best investment strategies for beginners, it’s also critical to understand the foundation of the strategies. Below are 3 important principles of investing to keep in mind before you put your money to work:
1. Long-Term Vs. Short-Term
First, before you start investing, you must understand your short-term and long-term financial goals. Your short-term goals are typically those that you want to achieve in the next 1 month to 5 years.
Short-term goals could include:
Having a kid
Buying a car
Buying a house
Going to college
Going on a big vacation
If you have any of these short-term goals, then it’s important to have enough cash saved in your emergency savings fund before you start investing in the rather volatile stock market. Long-term goals, on the other hand, include:
Saving for retirement
Saving for a long-term care event
Saving for a 50th-anniversary travel
These goals are typically far in the future – often times 3 to 5 decades from now. Because these goals are so far in the future, you can afford to take some risk in your investments and put your money in the market with higher risk. Why? Because if the value of your money does decrease due to volatile markets, then you still have plenty of time to recoup the losses.
2. Low-Risk Vs. High-Risk
Once you understand your financial goals, the next step is understanding your risk tolerance. No one can tell you what’s best for you – other than you. If you are a high-risk investor, then you can:
Invest in aggressive, high-risk stocks
Not panic sell your investments at market lows
Stomach the ups and downs of the stock market
Sleep at night when you lost 50% of your portfolio
While you can face major volatility, with high-risk investments, you can also see major profits ‒ over time. If you are a low-risk investor, then you can:
Invest in low-volatility stocks
Invest in conservative bond funds
Invest in money market funds or cash equivalents
Low-risk investors typically cannot stomach the market volatility and often resort to investing in a mixture of stocks and bonds.
3. Doing it Yourself Vs. Hiring a Professional
The last principle is knowing how much you don’t know. If you want your money to be in the hands of an experienced, knowledgeable investor, then you should consider hiring professional help. The best investment professionals typically have designations such as:
CFP(r) ‒ Certified Financial Planner
CFA ‒ Chartered Financial Analyst
You should also ask your professional if they are fiduciaries. Fiduciaries are people who are required – by law – to do what is in YOUR best interest, not the investment professional’s best interest. How much do investment professionals cost? The cost typically varies.
Typically, they’ll make money via:
Commission (they get paid a percentage of the products they sell you, like certain mutual funds)
Fee (they charge a percent on your total assets under management)
Flat Fee (they charge an upfront flat fee of $X,000in exchange for their professional insight)
Personally, I’d stay away from professionals who earn money through just commission. Of course, if you’re comfortable dealing with investing, then you might skip hiring professional help and just do it yourself. Doing it yourself can be immensely rewarding if you get it right… … But it can also be very frustrating (and stressful!) if you get it wrong.
Closing Thoughts
As you can see, there are many investment strategies for beginners that are:
Simple
Straight-forward
Easily implemented
You don’t need to be an experienced investor to start investing. In fact, the most critical lesson with these investment strategies for beginners is this: Just start. Even if you invest $5, that’s better than waiting. Your bank accounts will thank me later.
Want more actionable tips and strategies? Follow me on Twitter, LinkedIn, and check out my website.
Fiona Smith, Executive Contributor Brainz Magazine
Fiona Smith is the founder of The Millennial Money Woman. She holds her Master of Science Degree in Personal Financial Planning and has co-founded a local non-profit community teaching financial literacy. She is the author of the personal finance book How to Get Rich from Nothing and her work is featured on Forbes, Oberlo, and FinCon.
