It's human nature to create plans and strategies for just about everything, from navigating your car to work every morning to know what to buy at the grocery store (even if your shopping list is in your head). However, choosing the right investment strategy can be one of the most important financial decisions you make. So how do you choose the strategy that's right for you?
First off, it's crucial to understand that, when it comes to investment strategies, it's not a case of “one size fits all.” What works for you as an investor will not necessarily be appropriate for someone else.
So before we get into the nitty-gritty of the different types of popular investment strategies for beginners, let's find out what considerations will affect which strategy you choose.
What's in this Guide?
What to Consider Before Picking a Strategy
Before you decide which investment strategy to follow, you need to take a good look at your current circumstances and your future financial goals. Having these outcomes in mind will help you determine which strategy is right for you.
- Do you want to DIY or set it and forget it? Does the idea of choosing individual stocks to make your heart pound with excitement? Or do you just want to call up a financial planner and tell them to do all the heavy lifting for you? Decide whether you want to be hands on or hands off when it comes to your strategy.
- What is your timeline? Remember, here at Investor Junkie, we recommend investing for the long term. Whether that's money for your retirement, for the purchase of a home or for your kids' education, how far are you on your journey? If you are in your 20s and saving for retirement, time is on your side and you can afford to take on some level of risk. However, if you're going to be needing that money in just a few years, you're going to want to take on an entirely different and safer strategy.
- What is your risk tolerance? As we just said, those who have more time for investing and saving can afford to take risks, while others cannot. Now, it goes without saying that the higher return you expect, the more risk you'll have to take on. Do some soul searching and determine your risk tolerance.
- What return do you need? Define a number that you would like to see. Be honest; don't just say “I'd like a million jillion dollars.” Make a realistic estimate of how much money you will need for a comfortable retirement, taking into account any Social Security or pension benefits you hope to receive, as well as whether or not you'll be supplementing with a side income in your golden years. Do the math and write your lucky “retirement number” down. Likewise, if you're saving for a smaller — yet still important — event, such as your kids' college.
- What does your tax picture look like? Do you think you'll be in a higher or lower tax bracket in the future? By having an idea of your future tax situation, you can get a clearer view of what types of investments and accounts you'll need. On the flip side, if you currently need to defer taxes from investments, you'll want to choose one strategy over another.
The Best Investment Strategies for Beginners
If you think investing involves just buying and holding stocks, think again! Although individual stocks can play a significant part in anyone's investment portfolio, there are many other strategies you can now choose from. In fact, trading individual stocks might not be a good place for a beginner to start out.
In addition, the magic of the internet has opened up so many more opportunities that we would have just dreamed about a decade or two ago.
Let's dive in and take a look at some of the best investment strategies for beginners.
Investment Advice for Less With Robo Advisors
If you like the idea of a financial advisor who custom-fits an investment portfolio to your own needs — but don't have the cash to foot the bill — robo advisors could be a perfect fit for you.
Robo advisors first came on the scene just a few years ago. But they've revolutionized online investing for good.
Here's how robo advisors work: You input your current financial status, your future goals, and your risk tolerance, and the robo advisor uses computer algorithms to create a portfolio with a proper asset allocation to suit your profile. Robo advisors cost far less than traditional financial advisors, and some robo advisors even include assistance from a human professional.
Because robo advisors do the heavy lifting for you — and with low fees, to boot — they're a great choice for beginning investors. Our favorite robo advisors are Betterment and Wealthfront. With both services, you can set it and forget it and let your investments grow.
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Diversification With Commission-Free ETFs
Commission-free exchange-traded funds (ETFs) make for a great investment strategy for beginning investors who want a little more control than what they'll find with a robo advisor.
An exchange-traded fund is a basket of investments that are traded on the stock market. It can be made up of a combination of stocks, commodities, bonds and even currencies or real estate. As you can guess, they tend to be pretty diverse and are therefore generally safer than individual stocks.
To invest in a commission-free ETF, you'll need a stock broker that offers them. We think Fidelity is a particularly good choice for beginning investors since the brokerage has eliminated investment minimums and fees. The broker offers more than 250 commission-free ETFs to choose from.
Lend Money to Your Peers
Peer-to-peer (P2P) lending has become a popular investment, thanks largely to the internet. With PTP, you can earn a steady rate of return without having to deal with the volatility of the stock market.
Here's how P2P lending works: You use a lending platform to lend money to an individual or small business and collect interest in return. Easy peasy!
However, it should be noted that P2P lending is not without its risks. Therefore, this is a better strategy for someone who has the time to recoup any potential losses.
Become a Real Estate Mogul
Real estate investing can be an exciting strategy. But don't think it requires you to roll up your sleeves and become a flipper (although that can be an immensely rewarding career).
Instead, there are multiple ways to take advantage of profits from real estate.
One really cool way to get started is through an online service called Streitwise. This service lets you invest in something called a real estate investment trust (REIT), which operates as a stock.
You can start investing in commercial real estate with as little as $1,000. But note that these are long-term investments. They may not be a good idea if you need cash quick.
- Self-directed Accounts
- Due Diligence
Safe Returns From CDs
If you're looking to put your cash in a tried-and-true investment, you can't get much more dependable than a certificate of deposit (CD). They may not be sexy, but they are among the safest places to park your money.
CDs are usually offered by banks and credit unions. Like other savings accounts, bank CDs are insured by the FDIC up to $250,000 per depositor. Now, once your money is invested in a CD, you won't be able to withdraw that money until it reaches its maturity without incurring a possible penalty. This amount of time might be for a few months, or it might be a few years. But the interest rates can be pretty great. (Here are the best rates offered today.
A Little Goes a Long Way With Microsavings
Finally, if you want to invest just a tiny bit to start out, check out Microsavings options such as Acorns. This service rounds up every purchase you make with a linked account and invests the difference.
So if you order a $2.79 cup of coffee from IHOP, Acorns will round the amount up to $3 and put that extra 21 cents in your investment account. It's that easy. You can now set up even individual retirement accounts (IRAs) with Acorns, too. This is a great strategy for Millennials with plenty of time for compound interest to do its thing.
There are so many strategies for investing! These are just some of our favorites for complete beginners. As you check out our in-depth reviews, our archive of educational articles and our how to invest guide for beginners, you might find another investing idea that suits your needs. Remember, investing is not a “one size fits all” situation. But once you find a method that works for you, stick with it! We'll be here to help every step of the way.