Strategy is a fancy word for putting your long-term investment plan into action. Establishing a good investment strategy can help you stick to your plan. Here are a few common investment strategies to consider.
Select a wide variety of assets for your portfolio to help reduce investment risk. Diversifying in several investments will produce a return based on multiple holdings rather than relying completely upon the return of one investment.
Dollar Cost Averaging
Invest a set amount of money on a regular basis whether investment markets are moving up or down. When prices are high, your dollars buy fewer shares, or units of ownership in a company or mutual fund. When they are low, your dollars buy more. Keep in mind that dollar cost averaging does not ensure a profit or protect against loss in a declining market.
Active vs. Passive
Active investing involves a more hands-on approach and often results in more trading activity in an attempt to beat average market returns. Passive investing involves less buying and selling and often results in investors buying index funds, mutual funds, or ETFs in an attempt to reduce overall costs and achieve market returns.
Buy and Hold
An investment strategy where an investor buys securities and holds them for a long period of time with the hope that, despite potential ups and downs in price during the holding period, the ending price will be greater than the purchase price.
Target Date Investing
Involves buying mutual funds or exchange-traded funds that are designed to automatically adjust their asset allocation over time, based on a specific target retirement date. Target date funds are a popular choice for retirement savings since they offer investors a diversified portfolio that becomes more conservative as the targeted date approaches.
This is a strategy of buying stocks that pay dividends in order to generate an income stream or reinvest the dividends to purchase more shares. Some organizations offer specific Dividend Reinvestment Plans (DRIPs) for this purpose.
Tip from Steve Georgoulakis, CFP®
Investing is easy…buy low and sell high, right? Even the best investment strategies can be hard to maintain in the face of large market swings. Try to keep your emotions in check and spend more time with your strategy and less time reading the headlines, as tough as it might be.
Here are a few tips to keep your strategy on track.
Use Time, Not Timing
If you start early and invest regularly, you will likely be able to use time to your advantage. Do not try “timing” decisions to buy and sell based on the market fluctuations. It is extremely difficult to accurately predict the market fluctuations over the long term.
Keep Emotions Out of Your Actions
Investing decisions tend to be influenced by short-term variables and the latest news. Think and act intellectually, not emotionally. Investing success requires patience and determination. Do your homework and stay on course.
Avoid Chasing Performance
If you choose your investments by leaping into whatever is currently doing very well, you may be setting yourself up for recurring losses over time. You could find that the best performing stock in one year becomes one of the worst in subsequent years.
Periodically Review Your Investment Plan
You should evaluate your investment plan at least annually or at times of significant life events. If necessary, rebalance your portfolio to ensure your mix of investments aligns with your goals, risk tolerance, and time horizon.