You don’t need to know much about investing to be an investor.
You can hire someone to do the work for you, and let a professional make a plan, choose the products, and sweat the small stuff for you.
You can …
… But you may find that you’re still sweating the big stuff. Sweating when you look at your monthly statement and wonder if you’re getting the maximum return possible based on your age, risk tolerance, and goals.
A Strategy Sampler
It’s natural to be nervous about your nest egg. But a little knowledge about the methods that go into building and maintaining a successful portfolio could help reduce the worry and make you feel better about what’s going on with your accounts.
Here are a few strategies you might want to look into as your investing career evolves:
Having some knowledge about, or an interest in, a particular industry, sector, or type of investment can offer a few advantages when looking at assets to build a portfolio.
1. Investing in What You Know or Want to Know More About
Having some knowledge about, or an interest in, a particular industry, sector, or type of investment can offer a few advantages when looking at assets to build a portfolio.
• It could help in deciding if a product or company has the potential for long-term growth or if it’s a short-lived trend.
• It can help understand how a company makes money and how—or if— that money is used to benefit stakeholders.
• It can offer insight into a company’s products, strengths and weaknesses, and overall reputation.
• And it could help keep you more engaged with the investment as time passes.
If, for example, you’re into technology, and every new digital gadget grabs your attention, you may want to look at investment opportunities in that sector.
Do you feel you’ve found something that could have a meaningful impact on businesses and consumers and has long-term potential? It might be worth researching or talking to your advisor about investment possibilities.
2. Diversifying Across Different Industries and Asset Classes
Even if you’re new to investing, you’ve probably already been told often to avoid “putting all your eggs in one basket.” Building a portfolio means spreading your money across asset classes (cash and cash equivalents, stocks, bonds, commodities, real estate) and different industries or sectors (health care, tech, utilities, consumer goods, financial, etc.) to limit risk.
The idea is that the whole portfolio won’t be sunk if one investment goes down. Portfolio diversification can also catch the following hot stock or sector without taking unnecessary risks.
Buying a mutual fund or exchange-traded fund (ETF) can help an investor achieve diversification faster and with less expense than purchasing individual securities. However, fund investors still have to be careful about concentration. Buying ten technology ETFs doesn’t necessarily mean you’re well-diversified.
Owning two (or more) different funds doesn’t necessarily equal diversification. If the funds own the same stocks—perhaps because they follow the same index—you might not get any more diversification than you would by investing in just one fund.
3. Giving Cash Some Credit
Compared to most other investments, cash doesn’t register much excitement.
It’s generally safe. It’s usually easy to access. And, yes, most financial advisors will tell you that it’s a good idea to set aside a decent amount of cash in an emergency fund in case an unexpected expense arises.
But even though interest rates have been on the rise—making the returns from online deposit accounts and CDs more appealing to savers—compared to stocks or mutual funds, the money to be made on cash and cash equivalents can seem pretty meager. Some wouldn’t call some money an “investment” at all.
But investors can still find it helpful because keeping some cash available at all times can allow them to take advantage of opportunities in the market. Investors can use it for hunting for deals during a bear market or correction to purchase high-quality investments at bargain prices.
That means flexibility and liquidity are essential—so short-term investments and accounts that can be easily accessed tend to be more appropriate for the cash sidelined for this purpose than long-term CDs or annuities.
4. Taking a Contrary Approach to Typical Investor Emotions
You may have heard the old Warren Buffett quote about the best way to react to the stock market’s unpredictable movements: “Be fearful when others are greedy,” the Oracle of Omaha says, “and greedy when others are fearful.”
In other words, buy low, sell high.
But that’s easier said than done. Fear, greed, excitement, and disappointment can override logic when making investment decisions.
According to research from Dalbar Inc., which has been tracking investor behavior since 1994 with its Quantitative Analysis of Investor Behavior (QAIB), the average market investor consistently earns below-average returns—and that’s in large part because of bad decisions driven by emotions.
Everybody wants in when the markets are doing well—even if it means buying high. Investors jump out when the markets get shaky, which means selling low.
Those who understand market cycles and take an unorthodox approach—buying when stocks are “on-sale” and selling when others in the market are buying high—may find they benefit. But they must be ready to push down their emotions and stick to a disciplined plan.
5. Growth Stock Investing
There’s no telling which stocks will be the following big winners, but investors like to try to figure it out. Buying shares of a growth company early in its drive to greatness is the holy grail of stock picking.
This stock investment strategy aims to hang on as revenue and earnings rise sharply and reap significant returns as other investors catch on and jump aboard.
Growth investors look for stocks likely to produce market-beating returns by making educated choices based on information, not speculation.
That means looking at a company’s historical earnings growth and future growth potential. It also can help to research the company’s core values: What’s its reputation for innovation, how strong is its management, can it sustain its current momentum, what’s in the future for its industry, and what’s the stock’s short- and long-term potential?
People often consider growth stocks limited to small companies or companies in the tech sector. But these investments can come from any industry and be small-, mid-, or large-cap stocks.
Growth stocks aren’t necessarily a fit for income investors, as they typically don’t pay dividends. Volatility is another factor to consider—a higher potential upside comes with a higher risk of downside. But the earnings growth rate can be dramatic, and growth stocks can be a worthy addition to a long-term portfolio if they fit within your strategy.
6. Value Investing
Value investors look for stocks they think the market has undervalued for some reason. Perhaps a scandal has temporarily damaged a company or industry’s reputation, or a company cut its dividend, and the market overreacted to the news. Or it could be that no one is paying attention, and other investors are missing out on a good thing.
Whatever the reason, value investors look for opportunities to buy stocks at what they believe is a discounted price.
One way to screen for value stocks is to look for a low price-to-earnings ratio (P/E ratio), which tells you how much you pay for each dollar of earnings. (Remember: Past earnings don’t guarantee future results.) Some other metrics to consider might be price-to-book, debt-to-equity, and price-to-earnings-to-growth.
7. Playing Defense With Stop-Loss Orders
One way to help mitigate market risk in a portfolio is to set up a stop-loss order that automatically sells all or part of a position in a stock or ETF if it falls below a predetermined price limit.
A stop-loss order strategy can benefit new or nervous investors because it can be an easy way to get some control over an investment without selling out too soon. When the preset level is reached—for example, you’ve asked your broker to sell if a stock drops to $150—the stop will become a market order, and any shares held will be liquidated.
Stop-loss orders are considered a short-term trading strategy. They can be effective for investors concerned about a painful loss but can’t or don’t want to monitor their holdings constantly.
But they aren’t necessarily a fit for buy-and-hold investors thinking long-term. (Just because a stock drops in price doesn’t mean it won’t recover or should be sold.) The goal is to set the price low enough that the investment won’t be affected by a market blip but high enough that in case of a much more significant drop, the stock is dumped before too much pain is inflicted.
8. Rebalancing regularly
Rebalancing is a strategy that can help investors keep their investments aligned with their target allocations as the markets move up and down.
For example, if a person wanted a moderate 60% stock allocation, and stock prices went up (yay!) over months, that investor might end up with 70% or more in stocks instead. That might be a good time to sell some stocks to return to the original allocation.
Portfolios can be rebalanced at regular intervals (e.g., quarterly, monthly, annually) or at set allocation points (when the assets change a certain amount). A popular rule of thumb is to rebalance when an asset allocation changes by more than 5%.
Robo-advisors may offer an automatic rebalancing feature, or you may make the changes independently when needed.
The longer money is invested, the more potential it has to grow.
9. Starting Early and Staying Consistent
This is as basic as it gets: The longer money is invested, the more potential it has to grow. Investors who start saving early and stick to a plan are the most likely to see their nest egg thrive.
Saving money at all can seem improbable when times are tight—when you want to buy a car, go to college, own a home, and—you know—pay your monthly bills.
But if you can commit to making investing a part of your monthly budget—whether it’s a 401(k) contribution that automatically comes out of your paycheck or an investment account you set up online through TD Ameritrade—your future self will thank you. Making investing routine can remove the temptation to spend the money elsewhere.
And those investments can be expected to compound over time; investors earn interest on the money they deposit and the interest that money accrues.
Someday, that money could provide retirement income, pay for vacations, and help care for loved ones.
Picture Yourself at a Supermarket
Today’s investors have an overwhelming array of available products to choose from. It’s more than just the stock market—it’s a supermarket, and you can find anything you want there.
That’s not a bad thing. Investors can move down the virtual aisles and discover what works for them. Stocks, bonds, all kinds of funds, real estate, commodities—if they don’t like something, they can move on.
But if you’ve ever gone to the grocery store hungry without a list, you know what can happen.
You can end up getting too little. Or too much. You might find some new things you like—or decide your impulse buys were a total waste of money.
It’s the same with investment vehicles and types of investment strategies. It can’t hurt to do a little sampling, but it can help to understand what you want and how your choices will blend into an overall portfolio plan. That might be the best investment strategy of all.
Investing doesn’t have to be scary or overwhelming if you research your options carefully and start with an investment account that gives you as much control as you feel comfortable with.
Note: ZPEnterprises is not a licensed investor/financial advisor, but we are trying to share awareness of financial topics. Please do further research and work with a licensed financial advisor.
