So, you are new to investing. Before you look for the best investment strategy, you MUST do this one thing first.
Get Your Mindset Right
You have some savings that you can use for investment.
I assume that your savings are probably your hard earned money.
Why do I say this?
Because I want to remind you that it was not easy for you to save up so much money.
Perhaps it’s long hours in the office.
Or maybe it’s dealing with hard to please clients.
What is more?
You could have chosen to spurge all the money on yourself instead of saving it up.
Think about why you made the choice to save.
For early retirement?
A bigger house?
Kid’s college tuition?
Be mindful of your why and treat your money with more care.
Why do I say this?
This is because investing comes with risk.
But, too many people only look at the upside and ignore the downside risk.
That’s NOT the mindset you want to adopt when you start your investing journey.
Just image what you would do if you are asked to bet your entire savings on a fair coin toss.
It’s a double or nothing.
Would you do it?
Of course, you wouldn’t.
Then, would you be willing to risk 30% of your savings to make an equivalent gain?
Because losing a substantial amount of money could affect your standard of living. On the other hand, a comparable gain would not improve your life by as much.
In other words, you might feel the risk is not justified by the return.
So, why would you do it differently when it comes to investing?
Risk of Ruin
Below is the table of the risk of ruin.
You can see that the more you lose, the harder it gets to recover your loss.
In fact, when you lose 50% of your capital, you will have to make a 100% gain to make back your lost capital.
Warren Buffett famously said,
“Rule No. 1: Never lose money. Rule No. 2: Don’t forget rule No.1”
So, don’t get lost in pursuit of high return in the short term when you should focus on consistent returns for the long term.
Because the effects of compounding even moderate returns over many years are extremely powerful.
You can see it from the table below. An initial investment of $10,000 will grow to over 2 million over 30 years at an annual rate of growth of 20%.
Best Investment Strategies For Beginner
Invest in index ETF
An ETF is an exchanged traded fund.
You can buy and sell ETF shares just the same way as stocks.
An index ETF follows a specific benchmark index closely. For example, S&P 500 index ETF aims to track the performance of S&P 500.
Here are some reasons why buying index ETF is a good investment strategy for beginner investors:
- It’s passive
- Majority of active fund managers cannot beat the market
- It doesn’t require you to study how to select good stocks
Value investing is an investment strategy where you buy good businesses at a discount to their intrinsic value. In other words, you will be looking for undervalued stocks to buy.
Warren Buffett has used value investing strategy to help him make billions of dollars over the span of 60 years.
So, this strategy is proven to work.
Often, we have the misconception that if we want high return, we have to be willing to take high risk.
This is not true.
Value investing is one of the few strategies that can offer you low risk and high return.
Why is it low risk and high return?
Because value investors invest with margin of safety.
Margin Of Safety = Intrinsic Value – Market Price
The difference between the intrinsic value and the market price is called margin of safety.
What it means is that investors will only buy the stock when the market price is significantly below its intrinsic value.
A high margin of safety offers more protection and higher returns.
Dividend stock investing
Dividend stock investing strategy is about finding companies that will pay consistent and predictable dividends in the future.
Companies that have a long history of paying consistent dividends are generally well-established companies.
Examples of such companies are utilities companies and REITS.
The best part about this strategy is that it offers investors both income and capital appreciation.
Dollar cost averaging strategy
Dollar cost averaging strategy involves buying a fixed dollar amount of an investment on a regular schedule(i.e. monthly), regardless of the share price.
So, when the price is high, you buy fewer shares.
When the price is low, you buy more shares.
The best thing about dollar cost averaging strategy is that it helps reduce your risk of huge losses when you invest all your money when the market is at its highest.
No one can predict the future.
You won’t know whether the market will continue to go up or it will crash soon.
So, what you can do is to control your risk.
With dollar cost averaging strategy, you don’t have to be worried about buying at the high.
Because when the market comes down, you will be buying on its way down to lower your average cost.
In Summary, if you are a complete beginner to investing, the best investment strategies are those that minimize your risk while helping you achieve your investment goals.