What's the Right Investing Strategy for You? 7 Different Investor Strategies
July 20, 2022
Choosing the right investments can feel complicated and overwhelming. But breaking down your financial goals, risk tolerance, investment style, asset allocation, socially responsible investing, and how much you have to invest can help you determine what's the right investment strategy for you.
How to Start Investing
Getting started in investing means choosing the right investment strategy, the best investments, and understanding the factors that make up your strategy. For example, you should determine how much money you have to invest, your timeline, and risk tolerance.
What Are Investments
Investments are assets you purchase in the hopes that they appreciate and produce cash flow. The key is that you walk away with more money than you invested when the investment matures and you sell it.
Different Types of Investments
There are many types of investments for growth investors, value investors, and beginner investors. Stocks and bonds are usually a part of basic investing strategies. They are easy to understand and can be a part of a diversified portfolio.
Other investment options include real estate, real estate investment trusts, mutual funds, crowdfunding, index funds, exchange-traded funds, and mutual funds.
Short-Term vs Long-Term Investments
Most beginner investment strategies have both short-term and long-term investments. Short-term investing strategies are for those goals you want to achieve within the next five years. Long-term investment strategies are those goals you want to accomplish in 5 years or more.
For example, if you want to save for a down payment on a house that you'll buy in 3 years, that's a short-term investing strategy. But, if you want to save for retirement in 30+ years, that's a long-term investment strategy.
Active vs Passive Investment Strategy
Considering the different investing strategies, you should consider whether you want active or passive investment strategies.
Actively managed funds have higher fees, but a portfolio manager constantly monitors the investments, buying and selling assets as needed. Most active investing strategies aim to beat the stock market versus mimic or match its returns. Mutual funds are a typical example of active investing.
Passive investment strategies use a buy-and-hold approach. These investments have fewer fees because there's less turnover and the returns tend to be more consistent and less risky. As a result, they are better for investors who want a conservative investment strategy. Index funds are a typical example of passive investment strategies.
3 Different Investment Strategies for Real Estate
If real estate investing interests you, you can use three different types of investment strategies.
An appreciation investment strategy focuses on the growth potential of a piece of real estate, much like growth stocks, and is suitable for a growth investor. Appreciation investing is also known as growth investing.
What Is It
An appreciation investing strategy focuses on the property's potential. Most investors buy and hold the property, hoping its value increases during that time, hence the growth investing strategy. Appreciation happens naturally when the market value increases based on the real estate in the area. Still, it can also be somewhat forced by keeping operating expenses low and improving the property to increase its value.
Buying a single-family home and renting it out for years is an example of an appreciation investment strategy. You buy the property, make it suitable for renters, and hold onto it for many years. Some families make it a part of their generational wealth, passing properties down from generation to generation.
Suppose you bought a property for $100,000 and held onto it for ten years. When you sell it, you can ask for $200,000 for the property. You earned $100,000 in capital appreciation just holding onto the property.
- If the timing is right, you can get a higher value for the home when you sell it
- You can manage the appreciation by keeping operating costs low
- You can leverage the equity to build a larger portfolio
- There's never a guarantee that real estate will appreciate
- Home prices are often much higher in areas with historically high appreciation
- You may not be able to sell the property when you want if the real estate market favors buyers, as this means lower prices, aka less appreciation
A cash flow strategy is the best investment strategy for investors who prefer a steady income stream versus waiting until they sell the property. Cash flow strategies are also known as income investing.
What Is It
A cash flow investment strategy is like a dividend-paying stock. Investors focus on the cash flow they regularly earn versus the appreciation the property makes. Cash flow properties have enough income to cover the property's operational expenses and repairs while leaving enough cash for investors each month. Unfortunately, most cash flow properties are on the older side, cost less to purchase, and don't appreciate nearly as fast as properties purchased using the appreciation investment strategy.
Here's an example of an income investing strategy with real estate. First, you buy a single-family home in an area popular for renters and with an active job market. Then, you price the rent high enough to cover the mortgage payment, real estate taxes, monthly maintenance, utilities, and an emergency fund for unexpected repairs.
Each month, the rent you collect covers these expenses and leaves a cash surplus. You use the cash surplus to fund your retirement account. Then, when you sell the home, you take the capital gains (after taxes) and further invest in your retirement.
- You can have a steady flow of cash to count on each month
- You don't have to wait until you sell the house to see the profits
- Property prices are typically lower for cash flow properties versus those purchased for appreciation
- Appreciation of cash flow properties tends to be lower than other investment strategies
- There's no guarantee you will have a constant cash flow
- Vacancies, unexpected repairs, and market downturns can affect your cash flow
Some strategic investors prefer the best of both worlds, earning cash flow and appreciation in a real estate investment.
What Is It
A balanced real estate investment is just what it sounds like. You earn monthly cash flow from rent, and the property appreciates at a rate higher than typical cash flow properties. These homes are usually priced higher than cash flow properties but lower than properties meant strictly for the buy and hold strategy.
To use the balanced investment strategy, you'd buy a moderately priced home in an area known for high appreciation rates yet is popular with renters. The market rent prices are high enough to cover the operating expenses and cost of repairs and leave the investor with enough cash flow.
A strategic investor uses the cash flow earned to pay the mortgage down faster to make more equity or fix the home up to charge higher rents. This increases cash flow and appreciation, giving investors the best of both worlds.
- Combines two styles of investing for the best of both worlds, earning cash flow today and capital gains when you sell the property
- Works well in areas with a low cost of living, which means lower costs for investors
- Balanced properties typically have lower turnover rates
- Balanced properties are highly competitive because many investors consider them the best investment strategy
- You make the most money when you buy and hold properties
- Homes in the balanced investment strategy realm usually require more repairs
Other Popular Investment Strategies
A value investor seeks undervalued investments that they believe will appreciate quickly. In other words, investors believe the market will correct itself, and the asset will be worth more quickly.
Growth investors look for investments they know will skyrocket fast. Growth stocks don't pay dividends (usually) but have the potential for much higher capital gains if the stock takes off as predicted.
Momentum investing means investors rely on historical data and stock performance patterns. Investors using this strategy believe stocks performing poorly will consider to do so, and stocks performing well will continue improving. They thrive on the stock's momentum when choosing from the best investment strategies.
Dollar-cost averaging investment strategies don't look for undervalued or high-growth stocks. Instead, investors invest a predetermined amount regularly. If stock prices are low, they'll purchase more shares, and when they're high, they'll buy fewer shares. Ultimately, it balances out, giving investors the best of both worlds.
Smart Investment FAQ
What Is the Best Investment Long-Term?
Real estate is often named the best investment for the long term. Real estate goes through cycles, but it typically appreciates giving investors capital gains. Investors can earn monthly income and capital gains if they also use the cash flow strategy.
What Is the Best Investment Strategy?
The best investment strategy is the one that suits your risk tolerance, timeline, and capital you have to invest. For example, value investing in undervalued stocks, real estate, and businesses is the best strategy for some investors. Other investors prefer a more exciting growth strategy, whether they invest in the stock market or real estate.
How Do I Choose the Right Investing Strategy?
To choose the right investing strategy, think of your financial goals. Then, ask yourself why you are investing and what you want to achieve. For example, are you focused on cash flow or long-term capital gains? Knowing these answers will help you understand what's the right investing strategy for you.
What Do Most Successful Investors Invest In?
Most successful investors invest in stocks but have a diversified portfolio that offsets the stocks' risks. Taking some risk but balancing it with some conservative investments can help you achieve your financial goals.
What's the Right Investing Strategy for You? The Bottom Line
The right investment strategy for you may not be the right one for your sibling or best friend. Your investment portfolio should reflect your risk tolerance, timeline, and beliefs. Choosing the right investment strategies can help you achieve your financial goals faster, whether supplementing your income or focusing on long-term goals. Learn more by signing up and visiting our blog.
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