Investing is a great mechanism for building wealth and achieving savings goals, whether it’s to buy a new car, put a deposit down on a house, or retire with a comfortable pot of money.
While investing can be overwhelming at first, which is a reason many people steer clear of it, it’s important to understand that there are several different strategies that help you to manage risk well and tend to bring in a profit.
However, it’s best to start with the basics, so explore the five smart investment strategies outlined below.
When you buy assets that aren’t valued accordingly by the market, you stand a good chance of earning a high profit when investor attention takes hold of the asset. This strategy is called “Value Investing”, and it was created by esteemed inventor Benjamin Graham.
To figure out which assets are undervalued, you need to learn how to research companies using quantitative and fundamental analytics. This means diving into financial statements, analyzing competitors, and taking into account other factors like the current financial landscape. To find out more about value investing research, read this article.
As the name suggests, income investing is all about making investments that pay a steady passive income. There are countless different income investments to choose from including:
- Bonds: Issued by governments, organizations, and corporations to generate fixed investor income.
- Dividend stocks: High-value stocks that pay monthly dividends; they are a great way to mitigate risk.
- Annuities: Insurance products that come with a fixed income - a great option for retirement incomes.
- Real estate investment trusts (REITs): Companies that own shopping centers, housing estates, apartment buildings, and other real estate. By law, these companies have to pay dividends.
When building your portfolio of income investments, it’s essential to make sure you’ve diversified. To keep track of your portfolio and projected income, you can tinker with these investment calculators.
Growth investing means scouring the market for companies that are expected to grow at a rapid rate. In most cases, these will be companies starting out or working on products that are in high demand. For example, during the global pandemic, telehealth tech companies would have been a good shout.
Even though growth investing can have a high yield, it’s important to understand that backing the wrong companies can spell significant losses. To manage the risk, you need to learn how to Do Your Own Research (DYOR).
Index Fund Investing
Index funds have gained significant traction over the last few years, and there are plenty of valid reasons for why. Index funds are a version of exchange-traded funds (EFTs) or mutual funds that are designed to follow a specific market index - like NASDAQ and S&P 500. The most appealing part of index investing is that you can access a diversified asset pool without having to research separate stocks.
If you’re attempting to generate long-term wealth, then tax-efficient investing is one of the most stable options. Taxes have a habit of eating into any profits earned by investing, which significantly reduces the assets you have to re-invest. Fortunately, there are a number of ways to reduce the damage caused by taxes.
The most common strategy is to invest in Roth IRAs, IRAs, and 401(k)s, which all have a tax advantage. Alternatively, some investors choose to find tax-friendly options like municipal bonds, which are exempt from government tax. Similarly, ETFs have relatively low taxation because they have a pretty high turnover.
These smart investments are a great way to build wealth for the future. To choose the right one for you, you’ll have to fully understand your goals and have a grasp on your risk tolerance.