Investing can feel intimidating to even seasoned pros, but it’s especially the case for beginners. And most of it boils down to anxiousness over one key question:
“What if I lose most of my hard-earned money?”
Not all beginners have this mindset, of course. Some start investing with zero fear at all and are ready to tackle the riskiest of investments—though that lack of care can lead them right back to the same issue: losing all of their hard-earned money.
Our advice? No matter where you fall on the fear spectrum, it’s wise to learn the various investment strategies that successful traders use.
So let’s dive in! Today, we’re going to explore the best investment strategies for new investors. We’ll also discuss how to customize your own investment strategy, and we’ll field some common questions that beginner traders typically ask.
What Is an Investing Strategy?
An investment strategy is a plan that helps you determine how you’ll choose your investments, as well as the timing of when you will buy and sell them.
These strategies are based on rules so you don’t make each investment decision emotionally and inconsistently. By following a set of guidelines, your investment research will be easier, and you’ll be more likely to make sound decisions.
That said, investing and trading strategies aren’t one-size-fits-all, and they certainly can change over time. Those changes, as well as your initial strategy, will largely hinge on these factors:
- Available capital: How much money do you have to invest?
- Risk tolerance: Can you afford to lose all of your money? Some of it? None of it?
- Time horizon: How long will this money be invested? One year? Ten? A few decades?
- Goals: What are you hoping to use your investment gains for? Retirement, or a nearer-term goal? (This typically affects your risk and time horizon.)
- Type of account: What assets does your account allow you to invest in? Is the account tax-advantaged?
Depending on your level of financial literacy, you might feel comfortable creating your own investment strategy, or you might want to solicit investment advice from a financial advisor.
There are numerous tried-and-true investment strategies that work well for most investors, though the specifics of each trading strategy will certainly vary.
Beginners who are just starting to use an investment account should try the investment strategies below.
Best Investment Strategies for Beginners
The following seven investment strategies represent the most popular, broadly used plans you’ll come across. There are other, more complex strategies out there, but if you’re just starting out, these seven paths are where you should begin.
The buy-and-hold trading strategy simply means buying an investment and holding it for the long-term. While there’s no hard-and-fast rule on what constitutes “long term,” it typically means anything longer than five years.
This differs mightily from trading strategies in which investors more actively trade. For instance, with swing trading, stocks and funds might only be held for a couple of years, or even months. And with day trading, investments are held for days, sometimes hours, even minutes.
The buy-and-hold investment strategy typically works best with safer, more stable assets, such as blue-chip stocks. Long-term investment strategies like this also typically use stocks and funds that pay dividends (cash payouts to shareholders—more on that in a minute!), because those dividends can be re-invested and benefit more from compounding.
Here’s a look at the return someone could expect if they received just the price returns from the S&P 500 over the past 25 years:
Now look at how much better the return is when you factor in dividends (if you had reinvested the dividends back into the S&P 500):
Bonus tip: Tax benefits of long-term investing
Buy-and-hold investing could help you significantly reduce how much money you lose to capital gains taxes, which are taxes you pay on any profits you make from selling an asset.
That’s because long-term capital gains taxes (based on sales of any asset you’ve held for more than a year) are typically lower than short-term capital gains taxes (based on sales of any asset you’ve held for a year or less).
For example, let’s say your annual income is $40,000. In 2022, you earn $1,000 of capital gains from selling some stocks in your standard brokerage account (not an IRA):
- If you held those investments for less than a year, that would be a short-term capital gain, which is taxed at ordinary tax rates. So you’d be taxed at 12% and pay $120 in taxes.
- If you held those investments for more than a year, that would be a long-term capital gain, which is taxed at long-term capital gains tax rates. In this case, you would owe zero in taxes.
The length you hold different investments depends on your goals. Buy-and-hold investors typically are investing for retirement and other long-term goals. Thus, they hold stocks and similar investments for numerous years, qualifying them for a lower tax rate.
2. Value Investing
Legendary investor Warren Buffett said it best when he called investing “the process of laying out money now to receive more money in the future.”
Of course, Warren Buffett became a legend largely because of value investing.
When you go shopping, do you always buy at the regular price, or do you wait for what you want to go on sale? If it’s the latter, you’ll probably enjoy value investing. This investing approach involves identifying and then buying assets that, based on your evaluation of certain financial data, appear to be trading for a lower price than they should.
The hope, of course, is that you buy a particular investment, then other investors eventually see that the market is underpricing that asset, so they also buy in—driving prices higher to a “fairer” value, and resulting in profits for you.
Value investors use various financial tools, such as stock screeners, to find stocks that are undervalued based on certain important data. A few popular ways to value a stock include:
- Price-to-earnings (P/E): This popular method compares the price of the stock to the company’s net income, also referred to as profits, or in this case, earnings. So in this case, you’re valuing the stock based on its ability to produce earnings. To calculate, just divide the stock price (P) by the company’s earnings (E) per share over a 12-month period.
- Price-to-sales (P/S): P/S is different from P/E in that, rather than focusing on earnings (which factor in not just the revenues it brings in, but all the costs of operating the business), it values the company only by its revenues, also referred to as sales. Why use P/S instead of P/E? Well, one great use case is fast-growing companies that aren’t yet profitable. They don’t yet have earnings to compare them to, but they do have sales. To calculate, just divide the stock price (P) by the company’s sales (S) per share over a 12-month period.
- Price-to-book (P/B): This is a popular valuation method for companies with a lot of physical assets—say, a car manufacturer, which owns factories and machines and physical inventory (cars). Book value is the value of those assets. The idea here is that if a stock is priced lower than its assets, or “book,” chances are the market is undervaluing it. To calculate, just divide the stock price (P) by the company’s book value (B) per share.
When value investors use metrics like P/E and P/S, they often compare one stock’s valuations to a broader index (like the S&P 500) or the company’s sector or industry (two ways to group stocks with similar businesses).
3. Growth Investing
No matter what you invest in, you’re trying to grow your money over time.
But growth investing is a specific way of doing that.
Growth investing is buying stocks of companies (and other assets) that you expect to grow more rapidly than the average company. Growth stocks are typically found more often in certain sectors (say, technology) than others (like utilities) and tend to funnel much as cash as possible back into growing the company—research and development (R&D), new equipment, more employees.
Apple, Google parent Alphabet, and Tesla are all examples of popular growth stocks.
Growth investing can be more volatile (bigger swings up and down in your stocks) than value investing. A product delay or a bad financial report can easily derail their performance in the short-term. But growth investors can enjoy an excellent return on investment over time if they can stomach the ups and downs.
Consider Tesla. The stock has produced an insane return of nearly 15,000% over the past 10 years.
But investors had to endure a bunch of gigantic declines to get there.
Just be careful. While growth companies can provide excellent returns, they can also collapse quickly, hurting your overall portfolio. Some investors are better off mixing growth investments with less risky assets.
One way to spread out your risk is by investing in numerous growth stocks through funds, which we’ll cover down below. For instance, you might consider investing growth-oriented investment fund through a service like M1 Finance with their Domestic Growth and Global Growth Expert Portfolio Pies.
These invest in U.S. and global-based growth equities, respectively and purchase broad swaths of growth companies and not just concentrate your risk in a handful.
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Related: Best Investment Accounts for Kids
4. Income Investing
When we talked about both value and growth investing, the methods were different, but the goals were the same: buy stocks that will deliver high price returns (also called “capital appreciation”) over time.
But there’s another way to make money from your investments: passive income. And there are several ways of earning that.
One popular method is buying bonds. Bonds are simply debt issued by some sort of entity, whether that’s the U.S. federal government or a small pencil-making company. When you buy a bond, the issuer is basically promising to pay you back your entire investment at some point in the future, plus interest payments.
Those interest payments are a fixed, or constant, amount (hence “fixed income“), paid regularly—typically every six months. In fact, bonds are typically also referred to as “fixed income investments.”
Another popular method? Dividend stocks.
Like we mentioned earlier, some stocks will make cash payments, called dividends, to investors. These dividends typically are paid regularly, usually (but not always) quarterly.
Whether it’s a bond or a dividend stock, a term you’ll need to know is yield, which is the percentage of the investment you can expect back as income within a year. For instance, if you buy a stock at $100 per share, and it pays out $5 per share in dividends throughout the year, the yield on the stock is 5%. ($5 / $100 = 0.05, or 5%)
A few quick tips on dividend stocks:
Lower prices create higher yields …
If that $100 stock drops down to $50, but it continues to pay $5 per share each year, the yield will jump from 5% to 10%. ($5 / $50 = 0.10, or 10%)
… but only for new buyers
If you already bought a stock at $100, and it drops to $50, you’re still only receiving $5 each year on your $100 investment. That 5% yield is your yield on cost. The 10% yield is the yield on new money—you would only get that by buying new shares.
The higher the yield, the better? Not necessarily!
Think about what we just said above. If a stock loses half its value, its yield doubles.
But also, if a stock loses half its value, that’s a pretty clear sign of trouble! The company behind a stock that has fallen that much might be dealing with financial hardship, which means they might not have the cash to afford paying their dividend for much longer. While it doesn’t happen frequently, companies occasionally reduce or even suspend their dividends—meaning that high yield will turn into a low yield, or even no yield!
What’s a good dividend yield?
The truth is, there is no set answer to this question. What constitutes a “good” dividend yield depends on the market environment and how much risk you’re willing to take on.
Many investors are happy with any yield that’s higher than the stock market’s yield (typically measured by the S&P 500’s yield). Some investors look for yields that are higher than the 10-year Treasury’s yield at any given time.
For some, an income investing strategy is less about dividend yield, and more about dividend safety—they’ll accept a low yield knowing that the company is unlikely to stop paying dividends. If that sounds attractive to you, start your search with companies that routinely grow their dividends.
5. Index Investing (ETFs and Mutual Funds)
A particularly popular investing strategy among longer-term investors involves “index investing,” in which you purchase funds that replicate some sort of stock, bond, or other benchmark. (Think the S&P 500 or Nasdaq Composite.)
First, let’s look at the two main ways you can do index investing: mutual funds and exchange-traded funds (ETFs).
What is a mutual fund?
A mutual fund is a pool of money that’s collectively invested in stocks, bonds, or other assets. When you buy into the mutual fund, you share in the returns (or losses) of those assets.
You might pay one fee (or multiple fees) for the right to invest in that fund. Examples of common fees include annual expenses, which are paid directly out of the fund’s performance, and sales fees, which get taken out of your initial investment.
What is an exchange-traded fund (ETF)?
An exchange-traded fund (ETF) works similarly to a mutual fund in that it allows you to invest in a pool of investments.
However, it has several differences. The core one is that it trades on an exchange throughout the trading day, just like a stock. (All trading of a mutual fund, on the other hand, settles once per day, after the market closes.) And while it does charge annual expenses, an ETF has no other fees.
ETFs also typically publish the investments they hold much more frequently than mutual funds, and they enjoy a couple tax advantages that can provide a very small boost to returns.
What is an index fund?
There are two main types of mutual fund or ETF: actively managed funds, and index funds.
An actively managed fund is run by one or more portfolio managers who buy and sell the stocks, bonds, or other assets. They might have to follow certain guidelines (say, they can only by stocks of large companies), but they ultimately make the decisions based on their own research and intuition.
An index fund simply tries to replicate the performance of a specific market index, like the S&P 500 or Nasdaq Composite. It’s based largely on rules and computer algorithms. An S&P 500 index fund, for instance, will simply buy the stocks that make up the S&P 500 index, in the same ratios as the index. (The larger the stock, the greater its representation in the S&P 500.)
As a general rule, most mutual funds are actively managed, but there are index mutual funds. And most ETFs are index funds, but there are actively managed ETFs.
All funds provide some level of diversification, which means you’re reducing risk by spreading your money around. (For example, a fund might invest in several stocks within a certain industry; another fund might invest in bonds from 50 different countries.)
However, index funds are popular among long-term investors for two main reasons. 1.) They’re typically cheaper, because you’re not paying the salaries of numerous portfolio managers. 2.) Human managers often struggle to outperform these benchmarks … so if you can’t beat ’em, join ’em!
Just like any other investment, an index fund carries some risk; an S&P 500 index fund will drop if the broader stock market drops. And the investments in an index fund can change over time depending on the index’s rules—financial companies (like banks) made up 19% of the S&P 500 in 2000; in 2020, they only made up 10%!
6. Index Funds (And Just a Few Stocks on the Side)
What if you can’t make up your mind? What if you want to invest for the long-term and you know index funds are a smart idea, but you also think index funds are … well, boring?
Try owning a few index funds … and just a few stocks.
This way of investing still provides you with low-cost diversification through the index funds. But remember: Lower risk also can come with less potential upside. That’s where the stocks come in—yes, you’re taking on a little more risk, but they have more growth potential.
Plus, you’re more likely to stay engaged and involved if you’re keeping up-to-date with a few companies you’re interested in.
The exact split between how much money you invest in index funds, and how much you invest in individual stocks, depends on your goals and risk tolerance.
7. Dollar-Cost Averaging (Fixed Dollar Amount)
The dollar-cost averaging (DCA) investment strategy also can be used in concert with a long-term, buy-and-hold plan.
Dollar-cost averaging is when you purchase a fixed dollar amount of stocks or other investments at regular intervals, regardless of current stock prices. For example, you might purchase $100 worth of stocks at the beginning of every month.
If you have a job that offers a 401(k) retirement plan, it uses the DCA method, investing a slice of your paycheck into pre-selected funds every pay period.
This strategy has a value component, too, as you end up buying more shares when your investments’ prices are lower, and fewer shares when their prices are higher.
Dollar-cost averaging typically works out much better than trying to pick the perfect times to buy and sell investments. (Ritholtz Wealth Management’s Michael Batnick provides an excellent history lesson on the subject.) And it’s just plain easier—you don’t have to follow a complex trading strategy, and you don’t have to worry about what the stock market is doing. Just keep putting your money to work.
Just keep in mind that you might have to pay fees each time you buy some investments. In that situation, buying less frequently can reduce the number of transaction fees you pay. DCA works best with investments with low to no transaction or sales fees.
Frequently Asked Questions (FAQs)
How do you begin investing in the stock market?
Investing in the stock market is easier than ever. You need a brokerage account, but it’s simple to open an account with most online brokers. You’ll need identification, some information about yourself, and sometimes a minimum deposit.
You can buy a variety of investments from standard brokerage accounts and individual retirement accounts (IRAs).
An IRA is like a brokerage account, but with a few twists. It has some useful tax advantages, but you can only contribute a certain amount each year, and you can’t withdraw money early without facing heavy penalties.
Standard brokerage accounts don’t provide tax benefits. But you can invest as much money as you want, and you are allowed to withdraw money at any time, penalty-free.
Once you have chosen an online brokerage account and have signed up, most website interfaces are pretty intuitive. The hardest part (besides perhaps saving money to invest) is choosing the best investments and deciding how long to hold them before selling. Some people use robo-advisors to help them invest, others use human financial advisors, and many make their own investing decisions.
If you invest in the stock market on your own, you will need to develop an investing or trading strategy like the ones above.
Why should you start investing?
Investing money in the stock market is one of the best ways to make it grow. Putting your hard-earned cash into investments, such as stocks or index funds, is a much faster way to build wealth than, say, leaving your money in a savings account.
Good news: You don’t need much money to begin. If you invest even a small amount now, it can pay off significantly over time thanks to compounding, where you reinvest the money you earn, and that money earns more money. (But the more you can invest, and the more often you can invest, the better.)
And no, investing isn’t just for adults. If you are a teen or young adult that has some extra cash, it’s never too early to start planning for your future financial goals.
How much money do you need to start investing?
One dollar won’t buy you much, but it will buy more than it used to. Fractional shares, which have become more accessible over the past few years, allow you to buy a portion of a stock, putting companies trading at $100, even $1,000, within reach for every investor. And with many online brokerages and apps going commission-free, there are no extra costs to invest. Just put that dollar to work.
But how much money you should start investing with ultimately depends on your financial situation, age, risk tolerance, and financial goals as an investor.
Make investing part of your budget and carefully decide how much you can invest. You want to invest as much as you can afford early on to take advantage of compounding. However, never invest more than you can afford, and don’t invest any money you’ll need within the next couple of years.
How do you develop an investment strategy?
Creating an investment strategy will help you feel more confident in the investments you choose and prevent you from making impulsive, hazardous trades. When you have a system in place, you can also get a better idea of what is working for you.
When it comes to trading strategies, your research will center around fundamental analysis and/or technical analysis.
Fundamental analysis focuses on trying to determine a stock’s intrinsic value. By examining a company’s financial situation, you can determine what you believe the share price should be, allowing you to buy when it’s undervalued, and helping you avoid overvalued stocks.
Technical analysis focuses on a stock’s chart patterns and trends to determine the future price. This strategy is used primarily by day traders and swing traders.
You also need to consider a number of other questions, such as:
- Do you want to invest in funds? Active or passive?
- Do I want to invest in U.S. assets, or also international assets?
- What sectors/industries do I think have the most potential?
Time frame is important, too. Are you focusing on long-term investments, such as retirement? Or short-term investments, such as saving for a house within the next few years?
In general, the further away you are from a goal, the more aggressively you can invest, because you have time to make up for downturns in the market. However, as you approach your goal, your investments should become more conservative.
And lastly: Write down your investment strategy or trading strategy. This will help you remember it, and commit to it, and make tweaks if you decide it could be working better. Even if you’re investing passively, check in occasionally to measure the effectiveness of your strategy and make adjustments as you near your goal.