If you want to start investing, or if you’ve already begun but want to have a plan that will help you meet your financial goals, then choosing an investment strategy to guide you can be extremely helpful. Your strategy should be selected with goals in mind, whether you want to retire early and travel the world or just have enough money to pay for your kids to go to college while still covering your own expenses.
Here at Addition Financial, we work with our members every day to help them achieve their most important financial goals. Since we know that having an investment strategy can be useful, we’ve put together this guide to help you select the best investment strategy for your needs.
What are the 5 main investment strategies?
There are many potential investment strategies to consider for your portfolio, but these five are the most common and the most popular.
Growth investing
Growth investing is popular because, as its name implies, it focuses on making investments with significant growth potential. As a rule, growth investments are investments that have the potential to outperform the market. Growth stocks typically are issued by small-cap companies with between $300,000 and $2 billion in market capitalization.
The industries that are likely to fall into a growth investing strategy include technology and healthcare. Both are sectors where there’s a strong probability of disruptive products that can trigger exponential growth.
A growth investment strategy may be best suited for younger investors who are prepared to take a long-term view of their investments and wait out the market’s fluctuations.
Value investing
The value investing strategy is one that focuses on investing in stable, mature companies whose stock price may be undervalued. Another way to think of it is that value investing is a lot like taking advantage of a sale. If you buy stock at $80 that should be valued at $120 per share, then you will earn a significant return on your investment when the stock market catches up.
By its nature, value investing is more conservative and less risky than growth investing, but it also doesn’t have as much earning potential. Many value stocks are from blue chip companies, and many pay dividends to shareholders.
Value investing is suited for more conservative or older investors who still want to play the market but with less risk than growth investing.
Income investing
If you choose an income investing strategy, your focus is on investing your money where it can generate regular income for you. Some people choose to take their investment income and roll it back into their investment portfolio, while others may choose to use the money to supplement their regular income.
One of the most common types of income investments is dividend stock, which means that it’s easy to blend value investing with income investing. Other income investments include bonds, interest-bearing accounts, real estate and money market funds.
If you choose an income investing strategy, you should think about what your practice will be when you earn income from your investments.
Socially responsible investing
Socially responsible investing has two goals in mind. The first, of course, is to earn money. The second is to invest responsibly and primarily in companies that have the potential to change the world for the better.
Some examples of socially responsible investments might be green technology, renewable energy, environmental sustainability and social justice. Some of these things might have considerable growth potential and work well as part of a growth investment strategy, but there’s also a risk that you won’t see much growth in your investments.
Small-cap investing
Small-cap investing focuses on buying stock in small-cap stocks with market capitalization between $300,000 and $2 billion. It’s generally riskier to invest in small companies than it is to invest in larger, more stable and mature companies.
If you choose to focus on small companies, you’ll need to be prepared to do some research and do your best to vet companies before you invest in them to minimize your risk.
What elements should you consider when choosing a strategy?
Now that you’ve learned the above five key investment strategies, here are some of the factors that should go into deciding which strategy is best suited to your needs:
- Your tolerance for risk. Some people don’t mind taking risks with their money if there’s the potential for growth while others might prefer to play it safe. You’ll need to understand what your tolerance is before you choose an investment strategy, although everybody needs to take a little risk to save enough for retirement.
- Your age. If you’re fresh out of college with a long time until retirement, you can and should take more risks with your money to make sure you achieve your long-term goals. Older investors who may be close to retirement age will need to choose a more conservative strategy because they’ll need to liquidate their investments sooner and may not have time to ride out long-term fluctuations in the market. Considerations about age are sometimes referred to as your investment horizon.
- Your financial goals. While you think about how your age and risk tolerance will impact your investment strategy, you’ll also need to think about your financial goals. Do you want to buy a home? Pay for your kids to attend college? Retire early and travel the world? Whatever your goals are, you’ll need to choose an investment strategy that aligns with them.
- Asset allocation. Regardless of which strategy you choose, it’s always advisable to think about your asset allocation. As a rule, you want to have a mix of investments in your portfolio, something we’ll talk more about later.
It may be helpful to work with a Financial Professional to evaluate your risk tolerance and other factors to select the investment strategy that’s right for you.
Blended investment strategies to consider
When you’re choosing an investment strategy, the temptation may be to go all in with the strategy that most appeals to you. As tempting as that approach might be for its simplicity, most investors opt for a more balanced approach.
What we mean by blended is that even if you have a high tolerance for risk and want to adopt a growth strategy, you’ll be better served by balancing your portfolio. You may choose to have 70% or 80% of your money in growth investments, but it’s beneficial to put the remainder into some investments of the “slow and steady” variety to balance your risk.
Here are some other examples of what might be viewed as blended investment strategies:
- An older couple with ten years until retirement might put 75% of their investments into a value investment or income investment strategy but retain the rest to put into growth stocks or socially responsible stocks that interest them.
- Someone interested in income investing might put 60% of their money into dividend stocks and real estate investment trusts (REITs) and put the remainder into smaller tech companies with big growth potential.
- A young person using a low-cap investment strategy might reserve 15% of their investments for blue chip companies or a well-established ETF.
- People of any age might put a small percentage of their income into extremely safe investments such as CDs or US government bonds.
What we hope you’ll take away from this is that balance is important. Many experts suggest increasing your investments in lower risk options as your retirement age approaches.
Asset allocation within your chosen strategy
Speaking of risk, we’d be remiss if we didn’t mention asset allocation. Asset allocation refers to the percentage of your money that’s in any one investment. As a rule, you don’t want more than 10% of your money to be in any one investment and, as noted above, you want your overall portfolio to be balanced with a mix of high risk, medium risk and low risk investments.
The rule used to be that you could subtract your age from 100 to determine how much of your portfolio should be in stocks, so a 30-year-old investor should have about 70% in stocks and the remaining 30% in bonds and other low-risk investments. Some experts now prefer using 110 or 120 as the starting point to adjust for longer life spans, so that would translate to between 80% and 90% in stocks for someone who’s 30.
Another rule of thumb to keep in mind is that you don’t want more than 10% of your portfolio to be in any one investment. That means if you invest in growth stock that delivers a big return and ends up being worth 15% of your portfolio, you should sell some of it and put your earnings into other investments.
We recommend making asset allocation an ongoing process, reviewing your portfolio every six months to a year to make sure that you’re not over-invested in any one thing or taking too much risk.
Choose your investment strategy with help from Addition Financial
Choosing the right investment strategy is an essential step if you want your money to grow and provide you with the income you need to buy a home, send your kids to college or simply plan a comfortable retirement. The investment strategies and tips we’ve included here can help you balance your investments and get the returns you need to meet your financial goals.
Do you need a hand picking investments for your portfolio? Addition Financial is here to help! Click here to learn about our Financial Services program and schedule an appointment with a Financial Professional today.
Posted on Jun 27, 2023
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