The two most frequent questions I get from Millennial Money readers are “what do you invest in?” and “what are the best investment strategies?” I’ve received hundreds of those emails in the past month alone.
Your investment strategy is the approach that drives your investing choices.
The best investing strategies are ones where you can maximize your return while minimizing your risk.
There are several strategies out there. In this guide, I’ll walk you through some of the top approaches to choosing, buying, and selling your assets to reach your financial goals.
Top 7 Investment Strategies
Here’s a breakdown of seven of the most popular investing strategies you can use. Which one is best for you depends on your financial goals, risk tolerance, and timeline.
- Dollar-Cost Averaging
- Buy and Hold
- Index Investing
- Active Investing
- Growth Investing
- Value Investing
- Income Investing
1. Dollar-Cost Averaging
Dollar-cost averaging is a simple trading strategy where you contribute a certain amount of money to your investments at set intervals of time.
That could mean investing $100 a week, or $750 a month—the timing and dollar amount are completely up to you and depend on your goals and budget.
You can easily combine this strategy with other ones on the list. One of the biggest advantages of dollar cost averaging is that it eliminates the stress of worrying about market timing. Instead of monitoring the stock market and trying to buy at the right time, you’re investing routinely regardless of prices.
While your investment might buy you fewer shares one month when prices are high, it’ll get you more shares when prices decline. Over time, this strategy can level out your average purchase price, enhance your portfolio, and make you a more disciplined investor.
2. Buy and Hold
The buy-and-hold strategy is a tried and true tactic, and one of Warren Buffet’s favorite investment principles. It’s pretty self-explanatory—you purchase an investment and hold it for the long haul.
To be successful with this approach, you need to choose investments that are anticipated to perform well for years to come. So it’s important to do plenty of upfront research and project the long-term growth potential of any stock or other security you’re considering investing in.
When the market drops off, it can be really tempting to sell. As tough as it might be, you need to hold on to your stocks regardless of short-term market fluctuations for this strategy to work. Buy and hold is best fit for less active investors who are comfortable with a “set it and forget it” approach.
3. Index Investing
With index investing, you invest in index funds designed to mirror the returns of a benchmark index like the S&P 500. Index funds can hold hundreds of securities, helping to diversify your investment portfolio and lower your risk.
You can invest in an indexed mutual fund or ETF (exchange-traded fund). Some index funds focus on the entire market, while others hone in on one sector, industry, or type of company.
Since there are fewer trades taking place, index ETFs and mutual funds tend to have fewer taxable capital gains than funds that are actively managed.
If you’re looking to beat the market, index funds aren’t the best vehicle for you. You’d be better off with an actively managed fund with hand-picked stocks. But if you’re a long-term investor looking to match market returns, index investing is a solid strategy.
4. Active Investing
On the opposite end of the spectrum of buy and hold and index investing, you have active investing. Unlike passive investing, which is focused on long-term growth, active investors are usually looking for short-term gains.
Rather than just matching an index, active investors try to beat its returns. Instead of avoiding making trades based on the volatility of the market, this investing strategy leans into it to make impactful short-term profits.
To succeed at active investing, active investors mostly rely on technical analysis, factoring in past performance data to inform their trades. Professionals might also factor in fundamental analysis, looking beyond price data to other economic factors like a company’s financial statements.
You can actively invest for yourself, use an advisor, or invest in actively managed funds.
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5. Growth Investing
A growth investor’s main agenda is to increase their profits, and fast. To do that, growth investors usually hone in on growth stocks.
These are up-and-coming companies that are growing their revenue at a faster-than-average pace. Think of companies that offer innovative products and services that are hard for competitors to match. The technology sector is a great place for growth investing.
You can think of growth investing as offensive investing—rather than defending your earnings and steadily growing passive income, you’re actively trying to score high returns by investing in emerging markets.
While they sometimes come with a higher price tag than other stocks and investing in emerging companies is a high-risk endeavor, the growth potential is worth it for a lot of investors.
6. Value Investing
Opposite to growth investing, value investing is all about finding a bargain. More specifically, value investors buy stocks they think are being underestimated, ones that have more long-term earning potential than the market gives them credit for.
It’s like buying a new phone when it’s on sale. While the price might drop from time to time, it doesn’t change the intrinsic value of what you’re getting.
Value investors watch the market closely and jump on stocks from historically dependable and profitable companies when their stock prices drop for rational reasons, like a flop of a new product, that they think the company can easily recover from.
You can use tools like the price/earnings ratio to identify value stocks. And if you want to invest more passively, you can invest in value funds and leave the research to the pros.
7. Income Investing
Income investing is a strategy that focuses on producing a regular stream of passive income from your investments. This can come in several forms, from dividends to bond yields.
A lot of people automatically think of retirement when income investing is discussed, but you can invest to earn extra income at any age.
These investments could also generate capital gains if they increase in value, so you could make even more money if you sell them.
Here are a few assets that you can use to earn income through investing:
- Dividend stocks
- Dividend ETFs
- REIT (real estate investment trusts) dividends
- Money Market Accounts (MMAs)
When it comes to investing in stocks, income investing poses less risk than some of the other strategies on this list; however, the market always fluctuates. Just keep in mind that income can vary from time to time, and dividends aren’t guaranteed. And fixed income products like bonds and CDs have moderate returns.
Factors to Consider in Your Investment Strategy
Here are a few key factors you need to keep in mind as you build out your own investment strategy:
No matter what investing strategy you choose, there’s going to be some risk involved. But those higher-risk options have the potential to produce some really high rewards.
It’s important to figure out what your risk tolerance is as an investor and invest accordingly. As you consider a new investment, think about how much risk, and potential for reward, you’re taking on, and decide whether you’re comfortable with it.
You also need to decide whether you want to manage your own investments, get professional help, or take a hybrid approach.
Here’s a look at your options:
- DIY: With self-directed investing, you can actively choose your investments. manage your portfolio, and cut down on fees. The best investment apps provide a ton of data and research tools to help you make informed investment decisions.
- Robo-advisor: Robo-advisors provide automated portfolio management, using an algorithm to manage your investments and keep you on track for your investment objectives for low or no management fees.
- Financial advisor: Financial advisors can provide hands-on advice and actively manage your portfolio. They’ll also help with other financial subjects, like estate planning, taxes, and retirement, for a fee.
Which type of management is right for you depends on your investment style, level of expertise, and preferences.
Your investing timeline is one of the biggest considerations to factor into your investment plan.
Whether you’re investing for short-term goals or you’re in it for the long haul, here are a few recommendations.
Short-Term Investment Strategies (1-5 year horizon)
For short-term investing, I recommend you keep your money in a bond fund like the Vanguard Total Bond Market Index Fund or a Certificate of Deposit (CD) at your local bank.
These two options are definitely better than keeping your money in a traditional savings account at a 0.1% interest rate, where you are actually going to lose money due to inflation.
Another option if you’re willing to take on a bit more risk is a balanced index fund like the Vanguard Wellesley Income Fund, which invests in approximately 60% bonds and 40% stocks, so you can generate a higher return (with slightly higher risk).
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I think a lot of people sit on too much cash, but that’s a personal decision and for a lot of people; it helps them sleep at night. I sleep better knowing my money is making money, and even if I lose money in the short term, over time I will come out way ahead!
I’m not sure that I’ll buy anything large in the short term, so I’m keeping my investments focused on a longer-term time horizon. A lot of my early retirement calculations are based on mostly staying invested in equities and expecting a 6% compounded annual return over the next 30 years.
But, if you do want to save for a vacation, home, or car, or make an investment in the next 1 to 5 years, I don’t recommend putting your money into 90%+ equities like me.
That’s likely too risky since stocks can go up and down wildly over any short-term period. The last thing you want is for your investment to decline 20% right before you find the perfect house or are ready to take that vacation.
Long-Term Investment Strategies (10+ year horizon)
I manage 100% of my long-term investments myself and still follow my daily investing habits. I don’t work with any type of financial advisor or firm. It’s actually pretty easy to do yourself with a bit of reading and emotional bulletproofing.
A vast majority of the reason people get poor investment returns is that they get emotional. This is one of, if not the primary benefits of working with a financial advisor – they can help you control your emotions.
Once you realize how investing works – the opportunities and how to minimize your risk, it helps take the emotion out of it.
All of my long-term investments are held in four different accounts:
- Roth IRA
- SEP IRA
- Brokerage account
The first three are tax-advantaged, meaning I get a tax benefit when I either deposit or withdraw the money.
Taxes can take a massive chunk of the future earnings of your investments, so it’s important to minimize their impact as much as possible. This is why I always recommend maxing out your 401k, Roth IRA, and if you have a side hustle, your SEP-IRA before investing in anything else.
One cool feature of most IRA accounts is that you can buy and sell stocks inside them. I buy AMZN in my SEP-IRA.
Unfortunately, since the IRS wants to get its money, there are contribution limits on any tax-advantaged retirement account.
Where My Money Is Invested
I manage 100% of my long-term investments myself and still follow my daily investing habits.
Here’s a breakdown of where my money is invested, to give you an example of an investing strategy at work:
Index Funds: 70%
70% of my long-term investments are in index funds. My two favorites are the Vanguard Total Stock Market Index Fund and Vanguard Total Stock Index Fund, but I invest in a few others highlighted here.
About 80% of my index investments are in domestic funds and 20% in international.
I’m heavily invested in equities for the long haul. The best thing about keeping money in these index funds is that I don’t have to worry about it and they are low-tax since very little trading is done within them.
Also, 90%+ of investors don’t beat the stock market, so I prefer to track the market instead. Every dollar I invested when I started my financial independence journey in 2010 is now worth over 3 dollars today. That’s an insane return for just a few clicks on my phone.
20% of my long-term investments are in individual equities that I plan to hold for the long haul like Amazon, Apple, and Facebook.
When investing, I invest in companies I use and believe in. I buy, but I don’t sell stocks very often because I want to minimize my taxes and if you hold an investment for at least a year then it is only subject to capital gains tax – approximately 15-20%.
I don’t day trade or recommend that anyone day trade – it’s too risky and emotional for me.
It also takes way too much time and most people lose money. Day trading is actually one of my biggest money mistakes.
Real Estate and REITs: 5%
5% is invested in physical real estate and REITs. I am looking to invest in more real estate properties after my decision to buy instead of rent helped me make over $350,000 on a property in only 4 years.
I am planning to keep investing at least 5% of my portfolio in real estate and starting to explore investing in multi-unit buildings (but finding a deal is tough and this type of investing comes with a lot of hassles). I’ll keep you posted.
Non-Traditional Investments: 5%
5% is invested in non-traditional investments, like domains and art. While these can both be great long-term investments, they’re more speculative – but I know them well, so can make educated purchases. I have made a lot of money investing in domains and only recently started investing in art, but look to expand both. I’m a huge fan of domain investing.
How I Diversify My Investments
This percentage distribution fluctuates quite a bit during the year, depending primarily on the value of the individual equities that I own and my real estate property. As I continue to build more wealth I am planning to pursue other diversification opportunities (those mysterious assets classes and alternative classes the wealthy may or may not make money on!).
As you make more money, diversifying your asset allocation becomes more important, since you don’t want too much of your money in one type of investment. Right now I am probably a bit over-exposed in equities, but in my 30s, I have a long time horizon.
How to Avoid Bad Investments
Here are a few tips for avoiding poor investment decisions.
Be Wary of Investment Advice from Scammers
I hear more terrible investing ideas, than good ones. For instance, I attended a wealth expo and 90% of what the speakers shared was not only wrong, it was dangerous and destructive.
Then I sat and watched as over 6,000 people listened to pitches for everything from tax liens to software to the speaker who promised to only pick winning stocks.
A majority of the audience fell for it – lining up to pay thousands of dollars on speculative investing products that promised 30%+ per year. They will very likely all lose their money on strategies that don’t work.
I’ve also had family members who have been misled by financial advisors who promised returns of over 30% per year.
If anyone promises you any type of return over 12%, 99% of the time they are probably playing you!
That’s one of the primary reasons I started this website because there’s just so much confusing and misleading information out there. Don’t fall for the scams.
If you choose to work with a financial advisor, choose a legit one with a good reputation and the credentials to back up their services.
Don’t Invest in Anything You Don’t Understand
I’ve worked super hard for my money and don’t gamble it on investments I don’t understand. So many people, especially now that they know I have some money, try to sell me stupid investments. I don’t listen to pitches unless I solicit them.
An investment has to be really compelling for me to go beyond my core investing strategy. A vast majority of my money has been made and still sits in the following investments.
5 Tips to Avoid Crappy Investments
- NEVER buy a financial or investing product from someone you just met
- Getting returns 12%+ per year is ridiculously hard and if anyone promises you a return they are probably full of it.
- If you don’t understand it, don’t invest in it.
- Most “investments” people sell might have worked one time, if at all, and simply can’t be recreated by you. If you see the “results not typical” on any marketing materials rip them up and run the other way!
- There are no “secrets of the super wealthy” that anyone will sell you for $500 that you can actually take advantage of unless you have hundreds of thousands of dollars.
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As you can see, there are quite a few investment strategies out there. Which one is right for you depends on what you’re investing for, how comfortable you are with risk, and how involved you want to be.
All of these strategies have their benefits. Whatever route you choose, the most important thing is to get started.
Following my investment strategy and managing my investments myself were essential to helping me reach $1 million in 5 years.
My investments also continue to grow and I’m still benefiting from the compounding of the money I started investing in 2010.
Please remember that I am not a financial advisor and that any investing comes with risk, but I hope this helps you on your journey to financial independence and beyond.
What do you invest in? To learn more about investing in my book Financial Freedom: A Proven Path to All The Money You Will Ever Need
J.P. Morgan Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P. Morgan Securities LLC (“J.P. Morgan”), a registered broker dealer and investment adviser, member FINRA and SIPC. Millennial Money is a publisher of J.P. Morgan, (“Publisher”). The Publisher will receive compensation from J.P. Morgan if you provide contact details to speak with a J.P. Morgan representative. Compensation paid to the Publisher will be up to $500 per completed contact form. Compensation provides an incentive for the Publisher to endorse J.P. Morgan and therefore information, opinions, or referrals are subject to bias. J.P. Morgan and the Publisher are not under common ownership or otherwise related entities, and each are responsible for their own obligations. Investing involves market risk, including possible loss of principal, and there is no guarantee that investment objectives will be achieved.