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Investment Strategies: Which is the Best For Your Money

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Last updated on February 23, 2023

If you’re thinking about investing your money, that’s a smart idea. But you’ve worked too hard for your money to invest it haphazardly. Like anything else, a well-defined strategy will give you the best chance of maximizing your investing success.

If you’re a beginner investor, you may not even know where to start. In this guide, we’ll take a look at the different types of investment strategies and we’ll discuss the pros and cons of each.

Ultimately, there aren’t any perfect investment strategies. But by thinking carefully through your investing needs and goals, you can identify the best investment strategy for you. Here’s what you need to know.

Short-term vs. Long-Term Investing

One of the most important factors to consider as you’re trying to find your best investment strategy is how long your money can stay tied up in the investment.

Will you need to spend the money within the next five years? If so, that would typically be considered a short-term investment, while investments with time horizons of 5 years or more are generally considered long-term investments.

Long-Term Investment Strategies

If you’re going to need your money next month or next year, the stock market generally isn’t a good place to invest. It can experience too much volatility over short time spans.

Could the market go up next month? Of course. But it could also go down. No one truly knows which direction the market will move from day to day.

But over the long-term, investing in the stock market has proven to be a very dependable investment strategy. Since its inception in 1926, the S&P 500 has delivered an annual rate of return of roughly 10%.

But in exchange for the potential for high returns, investors must be willing to stick it out through wide swings up and down. For these reasons, you should typically only invest in the stock market if you plan to stay invested for at least five years.

Short-Term Investment Strategies

If you’re going to need to get your hands on your investment money within the next five years, you’ll need to choose a more conservative approach.

The primary goal of short-term investment strategies is to preserve your initial investment while still earning a modest rate of return.

High-yield savings accounts are a popular place to put short-term investment money. But there are other options as well, some of which may yield a better return, such as Municipal and Treasury Bonds, Certificates of Deposit, and money market accounts.

See our 7 Alternatives to High-Yield Savings Accounts.

Stock Investment Strategies

The most basic kind of stock market investment is the individual stock. When you buy a share of a stock, you become a minority owner in that company. You share in the company’s profits and may receive a shareholder dividend as well.

When stocks do well they can generate amazing returns for shareholders. But they also can expose you to a high degree of risk.

For instance, if you own only one individual stock, then the performance of your entire portfolio is tied to the success or failure of one company. However, the more stocks that you buy, the more diversified your portfolio will become.

Another common downside to trading stocks is that brokers often charge trade commissions and fees. Thankfully, many brokers have decided to remove commissions on stock trades. See the best discount brokers of 2020.

When it comes to stock investing, here are three popular strategies.

Growth Investing Strategy

With a growth investing strategy, the goal is to find stocks that have huge upside. In other words, investors are hoping for “explosive growth.” When investors look for growth stocks, they typically look for companies in industries that have the potential for quick expansion.

When growth stocks do well, they generally do extremely well. However, they also have the potential to fall fast and hard. That means if you don’t have a high risk tolerance, growth investing probably won’t be the right strategy for you.

Also, since growth stocks are often early in their development as a company, they rarely pay out investor dividends.

Value Investing Strategy

Popularized by the legendary investor Warren Buffett, value investing involves buying stocks that are trading below what they’re actually worth. Buffett has built an investing empire by buying stocks that have good underlying fundamentals, but may (for whatever reason) have fallen out of public favor.

Buffett and others like him believe that the typical investor is prone to over-react on good or bad news. Value investors, on the other hand, focus on a company’s intrinsic value, which is found by studying the company’s financials, and indicators like the price-to-earnings ratio, free cash flow, and dividend payments.

A value investing strategy is similar in many regards to a contrarian investing strategy. But the main difference between the two is that value investors focus solely on fundamentals, while a contrarian investor will often consider technical factors as well.

Dividend Investing Strategy

There are two main ways to make a profit on a stock investment. One way is through stock appreciation. (i.e. the stock rises in value). But the other way is through receiving investor dividends.

For example, Stock XYZ, may pay out an investor dividend of $25 per share each quarter. One of the great things about investing in dividend stocks is that you can derive a steady income from a stock, even during periods that it appreciates slowly (or doesn’t appreciate at all).

For this reason, some investors choose to invest solely in stocks that pay dividends. But it should be noted that while growth stocks can experience explosive appreciation, dividend stocks tend to favor stable, gradual growth. For this reason, dividend stock investing would be considered a more defensive investment strategy.

Bond Investment Strategies

Bonds are like an I.O.U. that can be issued by both private and public corporations. Bond issuers make interest payments on a regular basis (often twice a year), which means that they can provide a dependable source of income.

Bonds tend to have less volatility than stocks, so stock investors may choose to invest in bonds to offset some of their risk.

If you do decide to invest in bonds, you may want to consider purchasing shares of a bond fund. With a bond fund, you can buy or sell at any time (no need to worry about maturity dates), and you get the benefit of a professionally managed fund.

ETF Investment Strategy

With an exchange-traded fund (ETF), investors pool their money together to purchase a basket of securities. Mutual funds follow this same principal. However, ETFs offer a key advantage over mutual funds in that they don’t have any investment minimums.

As long as you can buy at least one share, you can get started with ETF investing. In fact, some companies like Stash even allow you to buy fractional shares of ETFs.

Whether you’re looking to invest in stocks or bonds, there’s sure to be an ETF that will fit what you’re looking for. Or, even better, you can buy an ETF that has underlying securities in both stocks and bonds.

Alternative Investment Strategies

There are certain investments that lie outside the spectrum of stocks, bonds, or ETFs. Here are a few examples:

Hedge funds
Commodities
Venture capital
Derivatives
Real estate investment trusts (REITs)
Fine Art

Many of these alternative investment strategies are only available to accredited investors and may have less liquidity and regulation.

However, REITs are definitely worth considering for all investors. You can buy publicly-traded REITs on the stock market or by buying shares of a REIT ETF. Alternatively, you can invest in non-traded REITs through a company like Fundrise.

Active vs. Passive Investing

So far in our guide we’ve looked at the different types of investments that an investor can buy such as stock and bonds. And we’ve seen how aggressive vs. defensive investors think through the specific stocks and bonds that are included in their portfolios.

But do you even need to worry about picking individual stocks and bonds at all? Active investors would say “Yes.” While passive investors, on the other hand, would say “No.” Here are the differences between these two opposing investment strategies.

Active Investment Strategy

With an active investment strategy, you or someone else, is actively deciding on a regular basis which stocks or funds you should buy or sell.

I say “someone else” because you may depend on a financial advisor to help you make those decisions. Actively managed mutual funds and ETFs would also fit into this category as they have professional fund managers who pick the underlying securities of the fund.

The potential upside to having a professional advisor and/or actively-managed mutual funds is that you can know your portfolio is getting professional oversight. But, on the other hand, high advisory fees and mutual fund expense ratios can cut into your returns.

Passive Investment Strategy

With a passive investment strategy, you don’t even try to pick and choose which stocks are going to win. You simply try to invest in a wide cross-section of the market as a whole.

One of the most popular ways to do this is to invest in funds or ETFs that track particular market indices. For example, S&P 500 funds track the performance of the S&P 500 index. Other popular indexes include the Dow Jones Industrial Average, the NASDAQ Composite Index, the Russell 2000 Index, and many more.

One of the best things about index funds and ETFs is that they generally have incredibly low fees. And, in most cases, they actually outperform actively managed funds.

Robo Advisors: A Blend Between Active and Passive Investing

Recently, robo advisors have created a nice middle ground between active and passive investing. Robo advisors use advanced algorithms to create custom portfolios that match their investor’s risk profiles.

One of the great things about robo advisors is that they typically use low-cost ETFs to build their portfolios. And they also charge affordable advisory fees. For instance, Wealthsimple charges an advisory fee of just 0.50% and Ellevest starts at only 0.25%.

But robo advisors offer a few things that you can’t get from strict index investing. First of all, you won’t need to buy a separate fund for stocks and bonds. Your robo advisor will make sure that your asset allocation perfectly matches your risk preferences. And most robo advisors will automatically rebalance your portfolio on a regular basis.

See our list of the best robo-advisors.

Retirement Investment Strategies

When you’re investing for retirement, there are several tax-advantaged accounts to consider. Here are a few of the most popular places to save your retirement money.

IRA Investment Strategy

As long as you have taxable compensation, you can contribute to a Traditional or Roth IRA. For 2020, the max that individuals under 50 years of age can contribute per year is $6,500. If you’re over 50, you can contribute up to $7,500 per year.

The main difference between Traditional and Roth IRAs is when you receive their tax break. With Traditional IRAs, you receive a tax deduction for the tax year that you made your contribution. However, you will owe income tax on your withdrawals in retirement.

Roth accounts, on the other hand, are taxed like regular income in the year of your contribution. But from that point forward, Roth funds grow and are withdrawn tax-free.

One of the great things about choosing an IRA investment strategy is that you get to choose whichever broker or robo advisor you prefer. And that typically means less fees and more investment options than are typically offered with employer-sponsored retirement accounts.

401(k) Investment Strategy

A 401(k) is an employer-sponsored retirement account. As with a Traditional IRA, the tax on 401(k) contributions is deferred until retirement. If you work for a non-profit or you work in public service, your employer may offer a similar account to a 401(k), such as a 403(b) or a Thrift Savings Plan (TSP).

As mentioned earlier, 401(k)s often charge higher administrative fees and have fewer stock and fund choices than self-directed retirement accounts. However, there are a few advantages to choosing a 401(k), 403(b), or TSP investment strategy.

First, you may be offered an employer match. For example, your employer can agree to match your 401(k) contributions up to 3%. Receiving an employer match effectively doubles every dollar that you invest in your account. So if you’re offered a match on your 401(K), TSP, or other employer-sponsored account, you should take advantage of it.

Second, 401(k) accounts come with higher contribution limits than IRAs. For 2020, the 401(k) contribution limit is $19,500. And when employer contributions are taken into account, the annual limit increases to $57,000. So if you want to invest more than $6,500 per year towards your retirement, a 410(k) investment strategy is one of your best options.

HSA Investment Strategy

A Health Savings Account (HSA) lets you save pre-tax money for healthcare costs. And when those funds are used for qualified medical expenses, the money is also spent tax-free.

Those are great benefits, but the advantages don’t end there. Once you reach retirement age, your HSA funds can be spent on any expenses without penalty.

You’ll just need to pay income tax on withdrawals that aren’t used for qualified medical expenses. This means that an HSA effectively converts into an additional 401(k) in retirement (in terms of tax treatment). So with an HSA, you can receive both immediate and future benefits.

However, in order to qualify for an HSA, you’ll need to be enrolled in a High Deductible Health Plan (HDHP). For tax year 2020, that means your deductible will need to be at least $1,400 for an individual and $2,800 for a family.

For 2020, you can save up to $3,550 per year for single coverage and $7,100 for family coverage. If you do happen to be enrolled in an HDHP, an HSA investment strategy could be a smart way to pay for today’s medical expenses and tomorrow’s retirement.

Choosing Your Best Investment Strategy

Ultimately, the best investment strategy for you is the one that you’ll stick with. Even the most dependable types of investment strategies can fail if not paired with investing consistency.

Once you’ve chosen the investing strategy that you think fits your personality and goals, determine to hang in there for the long haul. And to help you automate the process, consider setting up an automatic funds transfer and investing schedule with your broker.