Don’t Skip These Top Investment Strategies for Beginners
There are tens of thousands of people investing every day. Among them, there are gainers and there are losers as well.
How do gainers distinguish themselves from the losers in the long run? Why can’t losers survive in this market? There are a few basic tips and tricks for investing which you should learn.
Losers and gainers all start by investing. That’s the second action to take. The first is to learn a little about what you should and shouldn't do.
Since you’re reading this article, I’m assuming that you have gotten, more or less, an approving nod to kickstart your investing drive.
Welcome to the most exciting market ever. From academics to custodians to athletes, all types of people are into the investment market. But the real question is, how many of them truly know what they're doing? How many have the proper investment strategies? How many have been on a winning streak? And how many have spent the majority of their time on regrets and losses? What do you suppose would be the right investment strategies for a beginner like you?
Ultimate Guideline to the Investment Strategies for Beginners
First of all, you need to decide 'What’s your goal regarding investing?'
Your goal will help you build your investment strategies over the years. But before you get into that, you need to know about basic investment strategies.
No worries. Below, I will discuss the investment strategies for beginners, hoping to smooth their journey. Remember that there are no absolute guarantees when investing.
To help you better understand, we divided the article into three parts. Each part has multiple approaches.
They are:
- Portfolio Building Strategies
- Buying and Selling Strategies
- Stock Picking Strategies
All of these strategies have multiple approaches. Hopefully, they would be enough for you to understand the investment strategies as a beginner.
Strategies for Building a Portfolio
1. Asset Allocation
What if you invest all of your investment funds into the stock market and something happens like the 2007 financial crisis? Your entire investment will get affected and you will see no other option than to become hopeless. But we know there's always a solution for any issue.
To mitigate the risk of losing all of your investment funds by investing in a single market, you can allocate your assets. Possible means of asset allocation investment strategies, for beginners, are stocks, bonds, and cash.
2. Stocks
Suppose you think you’re good at predicting economic events and predicting the futures of companies, then it would be ideal to put your funds into the stock market. This market is highly volatile. There are high risks which can result in possible high returns or devastating losses.
If you have a long-term goal of investing in stocks, then chances are you will invest in companies and won’t withdraw your funds for the next 10-15 years. You just wait and see what happens. If everything goes well, there will be massive rises in stocks and, year after year, you will get good dividends.
3. Cash
Apart from those two approaches, you have the safe bet of investing in a savings account. As there are few ways to incur loss here, the returns will be petty. It is one of the first investment strategies for beginners, as they are initially skeptical due to a lack of knowledge about investment markets.
Check the current return of savings accounts and you will see how petty. But it may be worth it as you will not lose your money. No matter how little the return is, you will get compound interest. Still better than losing money. (Watch the bank's fees!)
4. Bonds
You may want to invest a particular amount of money and get a comparable high return year after year. What's the solution? For you, there's the bond market. Bonds are fixed-income securities. The fixed interest rate is called the coupon rate of the bond. A bond is a long-term financial instrument. You will get a fixed rate return over a long period. On the date of maturity, you will get your initial investment back.
5. Diversification
Shall we start with a recent, real-life example?
When the CVOVID-19 pandemic started, the prices of the majority of industries dropped, but a few particular industries rose astronomically. For example, the travel and hotel industries' experienced unprecedented falls, but healthcare, toiletries and biomedical industries gained a lifetime's worth of financial success.
What can you learn from this market behavior? If you invest all of your money in a single industry, you will always be living on the edge of a sword. At anytime, you can be sliced to bits. So, to hedge your bets, you need to diversify your investments in industry. You don't have to necessarily invest the same amount in each.
Diversification is one of the best investment strategies for beginners, as they hardly have the industry knowledge and market behaviour experience to risk everything on one 'bet'. For example, you could put 30 percent of your funds in a booming industry and 20 percent in a stable industry. Work out where to invest your money based on market potential and then diversify your investments.
You’re already on the winning track if you can successfully design this strategy.
6. Rebalancing
There are always opportunities to rebalance your investment portfolio. For example, before 2010, Nokia was a sure bet. Hypothetically, you'd have invested a lot of money there. But, then you predicted the rise of the android and ios operating systems. As soon as you understood their potential, you reshuffled your investments. You sold a particular portion of your investment in Nokia and invested those funds into ios and android operating companies. Similarly, suppose you think that this year the tourism industry will not meet its expectations and remain stagnant over the next five years. In that case, you'd sell your tourism industry stocks and invest in other potential industries.
I know you have personal goals regarding your investments. Rebalance your investments based on those goals. Don’t just change it for the sake of it, or be biased by the short-term market hype.
Strategies for Buying and Selling
1. Tax Efficiency
“Nothing is certain except death and taxes”- Benjamin Franklin.
This statement is true to a large extent, but you can manage your taxes through prudent investment strategies. You might be happy after a rather good deal, but when lose most of your profits to taxes, you will be really disheartened. Don’t worry. There are solutions for this. Our goal is not to encourage you to try to be exempt from taxes. Instead, we’re advising you to manage your taxes.
First of all, you need to understand how much you get to keep after tax deductions from your gross profits. If you think that this is not enough compared to the time and risks you have taken, then you have to change your strategy(s). It is best to build a tax-efficient portfolio wherein you will have taxable and tax-advantaged accounts.
Brokerage accounts are taxable accounts. With them, you will have to pay short-term and long-term capital gains taxes. (From a brokerage account, you can take out your investment anytime you want, with no tax issues.) If you have a short-term investment, your gross profit is subject to ordinary income tax. (Short-term refers to less than one year.) On the other hand, long-term (more than a one-year investment) is tax efficient. You will pay a more favorable, long-term capital gain rate. There are also tax-advantaged accounts, such as a 401(k).
According to SoFi:
As a general rule of thumb, tax-efficient investments, such as regular stocks, may be held in a taxable account.
At the same time, investors may want to hold inefficient investments, such as taxable bonds, in accounts that have preferential tax treatment.
2. Dollar-Cost Averaging
As you’re reading this blog, I assume you have at least heard about indexes. There are many index funds worldwide: Vanguard, Fidelity 500, etc., which follow the S&P 500. Usually, these indexes represent the overall market. You will get top-performing companies from all industries here. As for people who do not know the financial market, their decisions are susceptible to mistakes. They usually choose someone who will manage their money for them. Index funds do this.
You buy stocks of index funds when they are low and sell them when they are high. This is a basic 'Investing 101' rule. As the index fund represents the overall market, chances are that there will be fewer instances where one would lose money.
When one industry experiences a seasonal downturn, another rising industry will make up for that. There are balances in index funds.
3. Buy and Hold
Hypothetically, you are an engineer. You know about the future of cryptocurrency and other technological innovations such as virtual reality, augmented reality, robotics, self-driving cars, etc. You believe that, no matter what, these industries are the future. You may confidently buy shares in them and hold onto them for an extended period. You won’t sell them no matter how their shares fluctuate over a short period. The market trend will have little impact on your holding decisions.
For example, in 2012, you believed that cryptocurrency would be ubiquitous at the end of 2020 and invested 1300 dollars in bitcoin. In between, you remained indifferent regarding the market behavior and held onto your investment in bitcoin. How much will you have been worth at the end of 2020? 525 million dollars. Unbelievable! The principle applies to any industry. An early investment in Tesla shares may well have similar returns.
Strategies for Picking Stocks
1. Fundamental Analysis
You have ideas about a portfolio, stock diversification, and rebalancing. Now it appears it's time to buy stock(s), yet there are hundreds of companies listed on the exchanges. How will you know the ideal stock for you? All of a sudden, you are in a dilemma. Don’t worry. Beginners like you can start with a fundamental analysis. The name itself says it is very rudimentary. It’s the sales vs. revenue analysis, or financial statement analysis.
What's involved in a fundamental analys? All publicly-traded companies have to disclose their financial information and any info that might affect the investors’ decision. Quarterly, they share their balance sheets, income statement, and other important information. Try to read companies’ financial statements and their meaning; such as revenue, losses, profit, investments, etc. Then, also evaluate the economic condition of a country. Like, if there is a housing bubble, how is it going to affect that particular industry. Based on the analysis, you pick the stock(s) that seem to you that they have potential.
2. Technical Analysis
While fundamental analysis evaluates security, by looking at revenues and earnings, technical analysis emphasizes the historical and future prices and share volumes. For example, you check five years of the historical share price of a stock. You observe that there are always fluctuations in the price; therefore, you can easily predict that this stock will become volatile in the future. On the other hand, if the historical price of a security remains stable, you can predict the stability of this security.
Experts use many charts, tables, and formulas to evaluate security technically, but, as you’re a beginner, you can go to any popular financial website and evaluate a company from the data you find there. The charts, tables and formulas are self-explanatory. With time and experience, you will get to understand the more technical aspects of technical stock analysis.
3. Value Investing
We all know that we should buy stocks that are undervalued and sell stocks that are overvalued. This is 'Investing101'. But, how can one determine whether a stock is overvalued or undervalued? The answer is...... through fundamental analysis.
Warren Buffett is the living legend of this investment strategy. From an online article, I came to learn that he reads almost 500 pages of each company's financial statements. He reads the companies’ prospects, picks the currently undervalued stocks, and holds them for a long time. Value investors are not like some who buy a stock today and sell it the next day, when the price changes. They believe that the stock price will adjust in the long run, and at the appropriate time, they sell their shares. There may be a rises and falls of the stock, but a value investor keeps their nerve and remains 'indifferent' to the market hype. This is what one must do, if one wants to establish themselves as a value investor.
4. Growth Investing
For a growth investment strategy, you need to look at comparatively new companies. For example, before Amazon, there was nothing remotely akin to it. Amazon was the trigger that got the eCommerce sector growth.
Now, how do you analyze these newer companies? They don’t have long historical price records, nor have enough deciding factors to conclude the fundamental analysis. There are no straightforward rules for growth strategies. People look for and read company and industry prospectus to help them with their analyses. Based on their industry experience and their recent fundamental and technical analyses, they may make a decision at this point. If one predicts the correct growth companies, they will give one an astronomical return, over the years.
As a beginner, these strategies seem foreign to you. You may have difficulty understanding all of the principles mentioned above to begin with. No problem! You don’t have to jump in with both feet. Instead, put your time in to understand the investment strategies one by one. Also, don’t focus too much on the definitions and blogs. Instead, visit companies’ financial statements and keep up-to-date with the financial news. Through reading financial news and company prospectus and statements and the economic analyses of a country, you will learn about investment strategies and markets.
Best wishes to you.
Reference: SoFi Learn, Investopedia
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