What's The Best Investing Style?
With so many people using social media to advertise their $50 courses (with “free information”), it’s hard to know what the best investment strategy really is. The truth—unfortunately for our guru friends—is that the only correct way to invest is your way of investing. Below, I’ll outline the most common strategies investors use or have had the most success with. While one style may jump out at you, maybe you’re attracted to a combination, or want to try a few across multiple accounts. The more you explore, the better—again, there is no wrong way to invest.
Growth Investing
Growth investing targets companies that grow at a much higher rate than the index or other companies within their industry. Instead of offering a dividend, these companies often reinvest in themselves to keep expanding and innovating. The technique used to find “good buys” depends on the investor, and can range from statistics and chart history to FOMO or even the news. The most common growth stocks are classic tech stocks, which often have a higher market cap and are already established and growing companies. A common statistic for these companies is a high P/E ratio but a reasonable PEG ratio, meaning the company is actually growing rapidly.
Value Investing
The Warren Buffett special! “Why would I buy it if I wasn’t getting a bargain?” Right? Value investors look for companies with near-perfect fundamentals that are trading below their target price. With time on their side, the average value investor is in it for the long run and pairs well with capital appreciation and compounding dividends. These are the investors who try to time the bottom and top of the charts with accuracy and consistency. While value investing sounds like a guaranteed way to make money, it’s not. This style isn’t meant for the “set it and forget it” investor. Value investors often spend hours looking for stocks that fit their strict criteria for what makes a worthwhile investment. Moreover, just because the fundamentals are perfect doesn’t mean the stock is guaranteed to go up!
Income Investing
Income investing is perfect if you’re looking for the frequently hyped “passive income.” Income investors look for stocks with a high dividend yield and boring charts that show a very gradual, linear incline. With quarterly dividends, you can get paid up to four times a year from just one stock! These yields are often a small percentage of the share price (typically between 1% and 5% annually, but can be more). This style of investing is very low risk and favored by conservative investors seeking another income stream. While income investing offers lower volatility, it also has limited growth potential compared to growth or value stocks.
Index Investing
This makes up the majority of the investing population: people who want a 401(k) they can contribute to regularly and then check 20 years later to (hopefully) see many more zeros than they remember. Index investors want broad diversification, low costs, and steady, predictable returns. They often use ETFs that track popular indexes such as SPY (S&P 500) or QQQ (Nasdaq 100). With a low work requirement for actually executing trades, index investors are willing to trade off not living behind a screen for capped returns.
While the stock market is unpredictable, your investment strategy doesn’t have to be. The end goal for all traders is to make more money than what was initially deposited into their account—so as long as you can do that, your trading strategy works! Depending on how much you have invested, your risk tolerance, and even your age, some investing strategies may be more appealing than others. Make investing your own!
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