5 Key Investment Strategies to Learn Before Trading

An investment strategy is basically a set of rules to help you decide where to put your money. There are tons of theories out there, from easy-to-read pop investing books to super detailed ones by financial experts. It can get pretty overwhelming trying to figure out where to start. But if you focus on a few key strategies, even beginners can set themselves up for long-term success. Before you start trading, it's important to get a handle on the basic principles and techniques that have been proven over time. When used right, these strategies can help you manage risks and boost your returns. Whether you want to build a balanced portfolio, take advantage of market trends, or create steady income, knowing these essentials is crucial.

Here, we'll dive into five key investment strategies that every new trader should know about before jumping into the market. From value and growth investing to dollar-cost averaging, we'll break down the basics and benefits of each one so you know how they work and when to use them.

1. Dollar-Cost Averaging is About Regularity

Dollar-cost averaging is all about adding money to your investments on a regular basis. For instance, you might decide to invest $400 each month. So every month, you put that $400 to work, no matter what the market's doing. Or maybe you choose to invest $100 every week. By regularly buying into an investment, you spread out your buy points.

By spreading out your buy points, you avoid the risk of trying to “time the market” and putting all your money in at once. Dollar-cost averaging means you’ll get an average purchase price over time, which helps make sure you’re not buying too high. It's also great for building a regular investing habit. Over time, you’re likely to end up with a bigger portfolio just because you were consistent.

While dollar-cost averaging helps you avoid going all-in at the wrong time, it also means you won't go all-in at the perfect time either. So you probably won’t get the highest possible returns on your investment.

2. Income Investing Gives You Payouts

Income investing is all about owning stuff that gives you cash payouts, like dividend stocks and bonds. You get some of your return as actual cash, which you can spend however you want or put back into more stocks and bonds. If you have income stocks, you can also benefit from capital gains on top of the cash income. (Check out some top dividend ETFs and high-dividend stocks you might like.)

It’s pretty easy to use an income-investing strategy with index funds or other income-focused funds, so you don’t need to pick individual stocks and bonds. These investments usually don’t fluctuate as much as others, and you get the safety of regular cash payouts. Plus, good dividend stocks often increase their payouts over time, so you get more money without doing any extra work – making dividend investing a great passive income strategy.

Even though they’re lower risk than stocks in general, income stocks are still stocks, so they can drop in value too. If you’re picking individual stocks, they might cut their dividends, even down to zero, leaving you with no payout and a capital loss. Bond yields aren’t always great and can sometimes be so low that they don’t beat inflation, reducing your purchasing power. Also, if you have bonds and dividend stocks in a regular brokerage account, you’ll have to pay taxes on the income, so you might want to keep these assets in a retirement account like an IRA. So, it is important to undertake fundamental analysis.

3. Index and a Few is Low Risk

The "index and a few" strategy is all about using an index fund approach and then adding a few smaller positions to your portfolio. Like, you could have 94% of your money in index funds and 3% each in Apple and Amazon if you believe they're solid for the long haul. It's a good way for beginners to stick to a mostly lower-risk index strategy while also getting a bit of exposure to individual stocks they like.

This strategy combines the best parts of the index fund approach—lower risk, less effort, good potential returns—and lets more ambitious investors add a few positions. These individual stocks can help beginners learn about analyzing and investing in stocks without losing too much if things don't pan out.

As long as the individual stocks are a small part of the portfolio, the risks are pretty much the same as just buying the index. You'll generally get the market's average return unless you have a lot of really good or bad individual stocks. If you're planning to invest in individual stocks, make sure you put in the time to learn how to analyze them first. Otherwise, your portfolio might take a hit.

4. Buy Index Funds to Track the Market

The idea here is to pick a good stock index and buy an index fund based on it. Two big ones are the S&P 500 and the Nasdaq Composite. They both have a bunch of top stocks, so you get a nice mix of investments, even if it’s the only thing you own. Instead of trying to outsmart the market, you just own it through the fund and get its returns.

Buying an index fund is super simple and can give you great results if you stick with it. Your return will be the weighted average of the index’s assets. With a mix of different stocks, you lower your risk compared to owning just a few. Plus, you don’t have to spend time analyzing individual stocks, so you have more free time while your money works for you.

Investing in stocks always has some risk, but having a diversified portfolio makes it safer. To get the market’s long-term returns – around 10 percent annually for the S&P 500 – you need to hold on during tough times and not sell. Also, since you’re buying a bunch of stocks, you’ll get their average return, not the hottest stocks' returns. But honestly, even the pros usually can’t beat the indexes over time.

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5. Just Buy and Hold

A buy-and-hold strategy is a classic, and it works. The idea is simple: buy an investment and hold onto it, ideally forever, but at least for three to five years.

This long-term approach keeps you thinking like an owner and away from the active trading that often messes up returns. Your success depends on how the business does over time, which could lead to big wins in the stock market. Plus, if you never sell, you don’t have to worry about it or pay capital gains taxes, which can hurt your returns. You’re not glued to the market all the time, so you can do other stuff you enjoy.

You’ve got to resist the urge to sell when the market gets rocky. There will be big drops, maybe even 50 percent or more, and individual stocks could fall even further. It’s tough but necessary.

Some Tips for Beginners Regarding Investment Strategies

For those just getting into investing, it's important to have a good grasp of what you're doing and a solid plan. Here are some pointers to help you get started:

1. Learn the Ropes

Get the Basics Down: Understand things like stocks, bonds, mutual funds, ETFs, and other types of investments.

Stay Updated: Keep up with financial news, read books, and maybe even take some investing courses.

2. Define Your Goals

Short-Term vs. Long-Term: Know the difference between what you need now and what you're aiming for in the future, as this will shape your investment choices.

Risk Comfort: Figure out how much risk you're okay with, since this will affect the investments you pick.

3. Ease Into It

Start Small: It's smart to begin with a small amount, so you can learn the ropes without risking a ton of money.

Mix It Up: Don't put all your cash into one thing. Spread it out across different sectors and types of investments to balance out the risk.

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Conclusion

Investing is a smart move, but starting out can be tricky. Simplify things by choosing a solid strategy like buy-and-hold and stick with it. Once you get the hang of it, you can try other strategies and different types of investments. We hope that these tips help you to start your investment journey.