Investors today are faced with a pivotal challenge. On one hand, investing has perhaps never been more important; but on the other, ongoing uncertainty and volatility in the markets have made it increasingly difficult to know exactly where, when, and how to invest.
This is where investment strategies come into play. Whether you’re new to the investing world or simply looking for a refresher, here are a few different strategies to consider utilizing in today’s environment.
Passive investing is a strategy that aims to minimize active trading in favor of realizing profit over the long term. Rather than buying and selling constantly to capitalize on market fluctuations, passive investors subscribe to the notion that certain assets can be expected to appreciate over time, and that patience will ultimately be rewarded with positive returns.
A passive investment strategy might involve betting on the historical performance of a particular market or segment, most commonly by buying into an index fund such as the S&P 500. By holding these assets over time, investors avoid the need to predict and react to short-term price movements, while also saving money on trading fees and reducing their tax burden as it relates to capital gains.
In direct contrast to the passive approach, an active investing strategy aims to anticipate and take advantage of short-term public market fluctuations. Rather than playing the long game, active investors look to capitalize on monthly, weekly, and even daily price swings, buying and selling assets regularly to lock in gains.
Active investing requires an ability to read fundamental and/or technical indicators, in addition to broader market moves. And while less experienced investors can bypass these prerequisites by buying into an actively managed fund, they should be comfortable paying additional trading and management fees for their participation.
Growth investors buy shares of a company with outsized growth potential. Short-term growth investors aim to capitalize on their position after no longer than one fiscal year. For example, a previously lesser-known company may have just been listed on a public exchange, and an investor might try to ride the momentum of the company’s first-time public exposure. By contrast, long-term growth investors are looking to buy-and-hold a stock for at least more than one fiscal year, and typically much longer if they believe the company will continue to lead in their respective industry.
Value investors seek out assets that they believe to be undervalued by the market. Value investors are often characterized as “bargain hunters,” and tend to buy up shares of a company following a sharp decline in price, more specifically if they believe the decline to be unjustified. Value stocks also tend to offer cash flow in the form of dividends.
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Income investing has the primary goal of earning passive income, typically over the long term. This might include buying and renting out real estate, becoming a peer-to-peer (P2P) lender, or even earning monthly interest on a certificate of deposit (CD) or traditional savings account.
This is a broad strategy that can be implemented in different ways, with varying risk-return profiles. For example, renting out an apartment or providing a loan might earn a higher rate of return, but the associated risk, such as a renter or loan recipient defaulting on payment, is significantly higher than investing in a CD or leaving money in a savings account.
Indexing is a passive investment strategy that involves buying shares in a mutual or exchange-traded (ETF) index fund. As opposed to buying and selling individual stocks, index funds provide access to a diversified portfolio designed to mirror the performance of a collective market index, such as the Dow Jones Industrial Average, S&P 500, or Nasdaq Composite.
The underlying principle behind indexing is that investing in the overall performance of a specific market can be more reliably successful—and potentially less risky—than actively trading individual stocks. Historically, this notion has largely held up, with an index such as the S&P 500 producing an average annualized return of about 10.5% since 1952. But despite the perceived benefits, investors should be aware of economic factors that could negatively impact the overall market.
Contrarian investing is an investment style, more than a strategy, which is based on rejecting mainstream views on a certain company or asset class. Contrarian investors, such as Billionaire Warren Buffet, believe that consensus, or the “herd instinct” of market participants, is not an appropriate gauge of an individual asset’s potential future performance. If a stock experiences a sharp decline in price, the consensus response might be to sell the stock, but if a contrarian investor believes in the company or estimates the sell-off to be an overreaction, they will do the opposite.
Dividend growth investing is a specific strategy within the broader field of value investing and involves buying shares of companies that utilize excess cash flow to pay out regular dividends to investors.
This strategy can be leveraged creatively to maximize returns, and investors tend to hold dividend-earning assets for years or even decades to secure funds for retirement and defer tax obligations. While almost any investor can buy shares in a company and begin earning dividends, it does require some savvy to identify companies with sufficient growth potential, as well as to create a diversified dividend stream across multiple industries and sectors.
Alternative investments include private equity, venture capital, hedge funds, real estate, commodities, and digital assets. These asset classes tend to have less correlated risk-return drivers compared to public stocks and bonds, and can potentially increase diversification.
While the space was historically only accessible directly by qualified purchasers, and required elevated minimum allocations, recent regulatory changes and new business models such as Yieldstreet’s, which lowered the access threshold, opened access to space to a wider investor base.
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