The most common investing strategies
Income Investing
An Income Investing strategy involves buying securities that are paying dividends. Income investors believe they can expect a steady return on a steady schedule. Examples of this include: dividend-paying stocks, mutual funds based on dividend stocks, or bonds that produce steady income.
Pros
Returns can be decent while keeping the risk pretty low.
If you have huge capital to begin with, you don’t need to risk it on betting on the success of a business, and instead, you can live off of the interest earned off dividends.
Cons
This type of investing strategy requires a large sum of money upfront in order to see returns that we can get excited about. The average investor that is starting out simply doesn’t have the capital to see major benefits from this form of investment.
Income investors tend to focus more on the dividend rather than the value of the underlying company or asset they are investing in.
It can take a long time to see meaningful returns when practicing income investing, which isn’t great for those looking to create financial freedom and retire quickly. We’re talking 1-2% returns over a long period of time.
If you go for higher dividends and higher rates of return, you’re starting to get into more serious risk that can really backfire on you in the long run. If it’s income you’re after, you certainly don’t want a lot of risk involved.
Be very careful what you put your money into for income investing, and be willing to accept a very low rate of return.
Growth Investing
A Growth Investing strategy is centered around investing in companies that have high growth rates. Think of companies like Facebook, Google, and Apple—all relatively young companies, with high PE (Price to Earnings) ratios and lots of potential future growth.
Pros
A long-term growth investing strategy can result in high returns.
Capital can continuously be moved into the stocks with the strongest prospect of growth. But in reality, success in growth investing depends on getting the timing right.
Cons
Markets have changed from the way they looked in the ’90s and growth companies are harder to come by.
Being able to predict high growth industries may be easier than predicting the companies within those industries that will come out on top.
Small-Cap Investing
Similar to growth stocks, small-cap stocks focus on the potential of a company to show major growth. Investors, however, opt for younger, more risky companies, with the idea that if you buy them young and cheap, there is a chance that when they reach the size of companies like Google or Facebook, their investments can show massive returns.
Pros
In general, small-cap stocks, which are tracked by the Russell Index, tend to grow much faster than the overall big cap stocks like on the S&P 500 or the Dow Jones Industrial Average. But at the end of the day, it all comes down to stock selection.
Cons
Choosing the right stock is highly risky, as there is no shortage of small companies that go out of business or fail to show major growth.
Stock prices tend to show major fluctuations when big investors or large funds buy or sell stocks. This volatility may have less to do with the company itself and more to do with the actions of a few large investors. This can expose you to huge losses in your capital.
Sounds a little scary, doesn’t it?
Value Investing
Value Investing is about buying companies when they are on sale, priced far below their true value. This type of investing strategy takes principles from all the other types and comes out on top.
Value investors buy companies that they know will produce cash flow in the long run when they are on sale for a discounted price. Think about buying $10 notes for the price of $5. What’s not to like about that?
Pros
With Value Investing, you are able to get the highest returns with the lowest amount of risk.
You can buy companies when they’re on sale! You’re effectively buying stocks during an economic contraction, or during some kind of event resulting in economic problems or fear. And then they tend to go up back to where they were.
Cons
Value Investing is not for everyone, as those who want to reap the benefits quickly may find it challenging. Patience is required in Value Investing.
This kind of investing also requires know-how and education in order to be successful. It requires you to have an education and a base level of understanding. If you don’t know how to do it, you can lose money—and that’s the catch!
There is a reason Warren Buffett, Ben Graham, Mohnish Pabrai, and Charlie Munger choose value investing; the ability to generate high returns with minimal risk. Who doesn’t want to invest like Warren Buffet?
