Beginning Investment Strategies To Help Build Your Portfolio
Whether you’re a new investor just dipping your feet into the stock market or an experienced trader, having the right strategy is essential in keeping your profits up and avoiding unnecessary losses. You might think that just setting up a brokerage account and buying a few stocks is all it take to be successful. You may even watch financial shows and read investment blogs carefully following along the recommendations you hear or read. But without context, you could be making a big mistake.
Investing in the stock market blindly is the fastest way to lose your money. Even following the experts opinions can backfire. For one thing, they’re often wrong. But more importantly, not all stocks are right for all investors. Before you dive in, you need a strategy that compliments your investment goals and caters to your risk tolerance.
Finding the Right Strategy
There are a number of popular investment strategies that you can emulate. But before you decide on one, you’ll want to honestly address what your personal risk tolerance is. While a professional financial adviser can best assess your risk tolerance, you can get a basic idea through several online assessments that are free to use. Once you figure out whether you’re aggressive, conservative, or somewhere in between, you’re ready to develop a strategy.
The oldest and most popular investment strategy is known as Buy and Hold. As the name implies, you build a portfolio made of stocks you intend to hold long term – at least a year, but generally much longer. By avoiding turnover in your portfolio, you take advantage of long term growth trends and keep your tax liability as low as possible.
If you want a more hands-on approach, you can try a value-based or growth-based investment strategy. The value approach is to locate stocks that are undervalued based on their price-to-earnings ratio and often pay a dividend, as well. Growth stocks, on the other hand, typically have a high price-to-earnings ratio, but high future growth expectations to make up for it.
Other strategies, like John Bogle’s approach, is to avoid trying to time the market or pick winning stocks altogether. He advocates buying into an index like the S&P 500 and letting the natural cycle of the market, which tends to go up over time, take charge. However, it can lead to extremely high volatility and shouldn’t be used by more conservative investors.
One thing that’s true of all investment strategies is the importance of diversification. Just following an investment strategy isn’t enough – you need to make sure your portfolio is adequately diversified. This is done so that a single bad pick or economic weakness won’t sink your entire portfolio. You may have heard this expressed in the old adage, “don’t put all your eggs in one basket.” Once you figure out the best strategy for you and properly diversify your portfolio, you’ll be well on your way to becoming a successful investor.