Whether you’re a novice or seasoned investor, the reality is that no one’s approach to the practice is exactly the same. If it were, there would be no competition, nothing to learn and the market as a whole would be a lot more boring. Rather, it is a personal pursuit that takes into account myriad factors from your risk tolerance level to your annual income and long-term retirement goals. Before you partner with a financial advisor and take those first steps toward pursuing investing as a personal finance journey, it’s helpful to analyze which approach to investing is right for you.
The good news is there are plenty of routes to take and no method has emerged as being exactly right, all of the time. So, take the time to do a little industry research along with some self-analysis to find the right fit for you. Here are a few ideas to get started.
1. Value Investing
This investment strategy is most closely associated with billionaire Warren Buffett, who has been the face and name behind it for decades. In short, value investing is the process of simply investing in stocks that are underpriced for their value. In many instances, a high-performing company with a solid history of return might be going for less per share than it should be, and in these cases, Buffet’s school of thought is that those are the ones you should be taking a closer look at.
While this can be an ideal way to find companies that yield high returns for little up-front money, the kicker is that finding these diamonds in the rough can take a ton of work and research. You’ll need to dig into financial records and company histories to determine the ones that are performing well enough to take a gamble on. Moreover, even once you’ve found these elusive companies, you still have to wait for the stock prices to rise to see a significant return. If you are a young investor with years to spare, this is a pursuit worth looking into, especially if you don’t mind the backend investigation that is required.
2. Income Investing
On the other hand, income investing involves buying specific types of securities that deliver returns at a steady and predetermined interval. One of the most common types of securities associated with income investing are fixed-income bonds. While these are the best-known types, you can also choose from among exchange-traded funds (ETFs), dividend-paying stocks mutual funds and even real estate investment trusts (REITs).
If you are looking for a reliable income with little risk involved, income investing may be the ideal route for you. As payout occurs on a preset timeline, those closer to retirement might find this option preferable, though keep in mind that many securities, including bonds, require years to mature and reach the set payout date. Still, this is a tried-and-true investing strategy and should comprise at least a portion of every well-balanced portfolio.
3. Small-Cap Investing
Does the idea of risk scare you or excite you? If it’s the latter, you may consider small-cap investing a worthwhile and valuable approach. This is the act of buying shares of stock in companies that have a small market cap, usually worth no more than $2 billion. While these might hold smaller values at first, they can be especially appealing to savvy investors for the growth potential they offer. Alternatively, large-cap stocks are the ones with mass appeal and interest, making them among the most competitive and costly as well.
If you are willing to go after a smaller company that may hold a little risk, the payout could be worth it in the end, much like value investing. This is a strategy best pursued by more skilled investors who are comfortable navigating the high risk level and know how to trade these kinds of stocks, which can be a challenging process in and of itself. Keep in mind that if you are involved with an institutional investor, however, such as a mutual fund, there may be regulations and restrictions that control if and how much you can invest in small cap companies.
4. Growth Investing
Put simply, this investing approach is one that is primarily focused on growing a portfolio of money market investments over the long term. As such, investors will chiefly be looking for companies that can demonstrate reliable patterns of long-term growth or high profits. This is determined primarily by analyzing their financial histories to determine revenues and profits that are above average compared to other comparable industry peers.
Though traditional investment calculations, such as price-to-book ratios, might be high for these stocks, future-focused investors are those who don’t mind the price tag in exchange for the earnings. These high earners are most likely to be found within the emerging markets as well as blue chip and startup sectors, which may be small now but are poised to have a high uptick in the future as more consumers catch on. As one can imagine, this too is a risky strategy, as what appears to be a solid performer one year could turn the next, which is always the chance you take on any company.
Finding the Investment Approach That Fits Your Style
As aforementioned, none of the above strategies is necessarily better than the next. What investors should focus on is which one fits their lifestyle, interests, timeframe and financial goals. Leading with your risk tolerance level, you should next consider how much time you want to pour into background research as well as whether or not you want to invest in an up-and-coming industry or rely upon historically strong performers. Regardless, once you’ve made your decision, understand that a balanced portfolio is one that incorporates more than one or even all of these strategies to ensure that if one approach isn’t as strong as another, the bottom line is still salvageable.
