What are the Different Kinds of Investment Strategies? 

Even in the best of times, when the S&P 500 and other indexes are soaring, investing in the stock market can feel more than a little overwhelming. And that’s especially true when the markets swing up and down, as they do, caused by everything from interest rate changes to employment numbers to swings in our nation’s inflation rate. 

Stocks Remain Popular

According to a recent survey, more Americans than ever say they place money in the stock market. Gallup’s annual Economy and Personal Finance survey, from April 2024, shows that 62% of U.S. adults have money invested in the market – which includes everything from individual stocks, a stock mutual fund, or exchange-traded funds – numbers that look much the same as 2023 but also mark a return to stock ownership levels not seen since the 2008 (and the start of the Great Recession).

Learn Investing Basics

With so much changing information to absorb, and so many factors out of our control, it’s important to know the basics when it comes to investing strategies. As we look to the end of 2024 and the beginning of a new year, now is a good time to review your investments or consider other actions based on your tolerance for risk, your timeframe, or if you’ve had a life change (or two) since the last time you checked in.

Different Investment Strategies 

• Dollar-Cost Averaging. Dollar-cost averaging is an investment strategy where you spread out your investment purchases over specific periods to reduce the volatility of an overall purchase. Many people do this by automatically investing part of each paycheck in a retirement account.
  • For example, you invest a set amount every month of $200, which buys ZXY stock in your IRA. The price of ZXY stock fluctuates with the market between $10 – $20 per share. With your $200 monthly investment, some months you get 20 shares, other months you get 10 shares. The number of shares fluctuates, whereas your $200 monthly investment remains constant.

• Target-Date Fund Investing. People with 401(k)s and other similar investment accounts may opt for target-date retirement funds. These are funds that handle the diversification and risk management for you based on the approximate date that you believe you will retire.  A target date fund manager typically invests more heavily in stocks the further out you are from your retirement and then rebalances the investments to be more conservative as you get closer to retirement. These are typically for people with longer time horizons, investing for 15, 20, or even 30 years, and who don’t want to try to pick stocks.

• Value Investing. Even if you aren’t active in the stock market, you’ve probably heard of billionaire Warren Buffett, an investor and philanthropist who subscribes to a particular strategy known as value investing – which you can also think of as bargain-hunting for stocks.
  • Buffet Method. Buffett tends to buy stocks he thinks are:
    • Undervalued in the market.
    • Cheap or inexpensive relative to their worth.
    • Have long-term growth potential.
    • Maybe a specific industry is being slammed by members of the media and the stock price of every company in that industry has sunk. Or perhaps some other scandal has caused the stock price to slump. If Buffett, or other value investors, suspect a stock price has plunged too quickly – and the financials are sound – they snap up the stock, betting on an eventual increase in value.

• Growth Investing. Essentially a mirror image of value investing, growth investors focus on buying stocks that they believe will outpace the growth of their industry (sometimes called a sector) or the market as a whole. They buy shares of companies that are growing quickly even if those companies look expensive compared to others in the marketplace.  As tech stocks rallied in recent years, this was a lucrative strategy. 

• Asset Location. Pamela Chin, a CFA and CPA with Refresh Investments in Santa Monica, California, says she counsels her clients to consider taxes in determining what types of funds and exchange-traded funds (ETFs) to include in various investment accounts. Known as asset location, Chin says that “for brokerage accounts where capital gains and interest income are taxed annually, lean towards more tax-efficient investment strategies.” She also notes you should consider tax-inefficient strategies (ie: income-generating investments) in your retirement accounts which are not taxed until the funds are withdrawn.

Diversification For the Win 

No matter which strategy you lean into, it’s smart to make sure you have a diversified portfolio when it comes to retirement planning. Why is that? Diversification helps ensure you don’t put all of your risk in one place. Even value investors look for a range of companies across industries to hedge their bets. Having a healthy mix of investments, including stocks, real estate, hedge funds, annuities, and bonds should help reduce risk and can prove to be a solid strategy over time.

With reporting by Casandra Andrews