You probably work very hard earning your money and putting a few bucks aside. But once your savings grow, you then wonder what to do with it to make it even bigger. What’s the point of having $10,000 sitting in your ING account paying less than 2%, right? This is the moment when you start looking for an investment strategy: will you invest in stocks or bonds? Dividend or penny stocks?
What’s the best investment strategy? That all depends on your type of investor. I’ve listed a bunch of investment strategies; let me know which one is your favorite!
Well, duh! This is obviously my favorite investment strategy. Over time, I think it is one of the best investment strategies. When a company pays dividends, it is usually because it makes money. The fundamental of any investment is to make money. Therefore, selecting stocks with sustainable dividends is also selecting stocks that have a great chance of growing in the future. You can see my dividend holdings here.
Coach Potato Investing
The idea of coach potato investing is seducing: you build a passive ETF portfolio and simply rebalance it once in a while. The idea is to simply follow major indexes related to stock markets, fixed income and commodities. It doesn’t require much time and it’s quite inexpensive in terms of transaction fees. This is why it is so popular. You can’t obviously expect to beat the market since you are replicating it and still, it is a good way to invest if you don’t like reading too many financial statements. Dan Bortolotti @ Canadian Couch Potato does a good job explaining index investing.
You already know what I think of technical analysis; I’m definitely not a big fan. The main reason is that I can’t get my head around the fact that a simple graph with a few stats can dictate where the stock will go next. If the company makes money, I don’t care if there is a Hidenburg Omen, I will buy it anyway. Nonetheless, many people make money from technical analysis since they are attached to their computers for many hours and find patterns. Registering for the free INO trading course will show you how it works.
Market Neutral Strategy
This is an interesting investment strategy where you are long (buy) a stock and short (sell) another one. For example, let’s say that you think that Apple (AAPL) will to better than Microsoft (MSFT). You can short MSFT and buy AAPL with the money. We call this investment strategy “market neutral” as the goal is to benefit from both rising and decreasing stocks at the same time. You guessed right; the key in this strategy is to pick the right stock AND the right direction. Intelligent Speculator shows some of his market neutral trades on the sidebar of his blog.
Trading options is a great way to hedge your portfolio. For example, you can buy put options (options to sell) where you can sell your stock at the put option even if you hit a market crash and the stock drops by 20%. The call options enable the investor to buy stocks at a fixed price. This is also a good strategy when you expect the stock to go up. If it doesn’t you don’t have to buy the stock and let the option expire (each option has an expiry date). Martin @ Hello Suckers trades options within his investment strategy.
I used to play this game when I started trading. Penny stocks are fun to trade since you can buy a stock at $0.20 and it could fly up to $2.00 in no time. This is a great way to make a lot of money. The problem is that the trade could go the other side! I also bought a penny stock that kept on climbing (from $0.37 to $1.41) and rapidly (over lunch time!) fell back to $0.45. This was the last trade I made on penny stocks. I’ve worked too hard to lose money like this!
For me, trading forex is like playing at the casino. Forex trading strategy is making money from currency variations. If you think the US dollar will go up compared to the Yen, you can make a trade based on your assumptions. There are so many things influencing currencies that I would never try to play around Forex. But that’s just me!
I’ve long been a growth investor looking for companies that will burst their way to the top. I can actually classify my investing style as aggressive growth back then. Very few of my stocks were paying dividends and I used to focus on future potential. I found this trading strategy very demanding as you need to understand what the company does, where it is heading and combine it with the overall industry and economic environment. It always feels good when you pick a stock that grows by 70% within a year but it’s highly time consuming. Don’t forget that for each homerun, you will strike out at times as well!
Combine Different Investment Strategies
Many investors will decide to combine 2 or more investing strategies in their portfolio. For example, I like combining my previous aggressive growth investing style with my current dividend investing policy. Some others will build a core coach potato portfolio and add dividend stocks or options to hedge their positions. I believe the key is to build a core portfolio based on a solid investment strategy and add other stocks as a complement.
Which investment strategies do you use most? Why?