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There are many types of investing strategies you can use to reach your financial goals. However, not all of them are best suited to your risk tolerance or the type of investing you’re most comfortable with.

I’m going to outline some common investing strategies along with their pros and cons, so you can get a better understanding and sense of which ones resonate with you.

It’s important to note that these strategies can overlap, and many investors combine multiple strategies to diversify their portfolios and achieve goals.

Types of Investing

Growth Investing

This investing strategy focuses on investments with high growth potential. Investing in these stocks or other assets provides the potential for significant capital appreciation over the long term.

Growth investors look for companies with strong earnings growth, innovative products or services, and expanding market share.

Pros

• Potential for high returns if the companies picked experience rapid growth and their stock prices increase accordingly. This can compound if they reinvest into research, development, and expansion.
• Involvement with hot sectors and tech advancements. If you pick companies that outperform their competitors, they’ll experience higher market share and value.
• Diversification is possible if you chose to invest in the leading companies across different sectors and industries. This helps spread risk out.

Cons

• Volatility and risk become a problem when investor expectations, market conditions, economic factors, company-specific news, market sentiment, etc turn negative and affect valuation.
• Unpredictable future events can cause drastic deviations from predictions and expectations for both investors and the companies themselves.
• Limited or no passive income since most of these companies reinvest their profits into growth rather than paying dividends to shareholders.
• Overpaying due to inflated valuation from high investor expectations compared to a stock’s relative earnings or book values.

If you pick the right companies and can hold through years of volatility to capitalize on long term growth, this might be the strategy for you.

I don’t personally like this strategy in itself because it’s too risky without enough short term benefits. Also investor sentiment often skews company valuations compared to what I see analyzing the fundamentals.

Using my strategy, there’s a way to invest in growth stocks AND get the benefits of dividend payouts. I have several in my current portfolio that are earning 10-12% yield.

The assets I choose increase diversification which lowers the overall risk of the portfolio. And their prices are much more favorable compared to popular growth stocks.

Value Investing

Value investors look for undervalued assets that they believe are trading below their intrinsic value.

They search for companies or assets that are temporarily out of favor or overlooked by the market, aiming to buy them at a discounted price and hold them until their value is recognized.

Pros

• Investing in undervalued assets creates a potential for high returns when its price rises to the asset’s intrinsic value.
• Because you purchase assets significantly below their intrinsic value, the margin of safety created protects investors from downside risks and provides a cushion in case of market fluctuations.
• Investors have ample opportunities since they often go against the crowd sentiment.
• Assets are chosen based on solid financials and growth potential determined from fundamental analysis.

Cons

• It takes a lot of work to identify undervalued assets. It takes even greater patience to wait years for the market to recognize the true value of assets.
• Investors sometimes get stuck in value traps when an asset doesn’t turn around or underperforms.
• Limited upside potential compared to high-growth sectors. Or value stocks take a lot longer than news-fueled growth stocks.
• Valuing assets requires making judgements that can be subjective and potentially bias assumptions about future cash flows, growth rates, and risk.

If you like a strategy that requires discipline, patience, research, and a thorough understanding of the companies or assets being considered, then value investing might be for you.

This one piqued my interest early on, but its lack of market sentiment makes it really frustrating to play the wait game. What you can do is apply this strategy to CDs, bonds, and preferred shares that have a par value.

That’s one of my favorite tactics for those asset classes. It makes it easy to determine which ones are undervalued and it’s just a matter of time before they go back to their par value — all while paying interest and dividends.

Dividend Investing

Dividend investors prioritize investments that generate regular income through dividend payments.

They seek out stocks or funds that have a track record of paying consistent dividends and focus on building a portfolio that provides a reliable stream of income.

Pros

• Buying dividend-paying assets provides a consistent stream of income.
• Dividend-paying stocks tend to be more stable and less volatile than growth stocks.
• By selecting profitable companies with a history of consistent earnings investors can achieve long-term portfolio growth by reinvesting dividends and allowing them to compound over time.
• Companies that consistently raise their dividends create a hedge against inflation for investors.

Cons

• Paying dividends may reduce a company’s ability to grow themselves. This will limit capital appreciation compared to growth companies.
• Dividend stocks can be sensitive to interest rate changes. If investors jump ship to pursue other fixed-income investments when rates rise, the low demand for dividend stocks causes a drop in market value.
• If you focus on high dividend yields and end up in just a couple sectors, you potentially reduce your diversification. That creates risk if those sectors face challenges or economic downturns.
• Dividend payments are not guaranteed, and companies may reduce or eliminate dividends in challenging economic conditions or when their financial health deteriorates.

If you like the idea of consistent cash flow and lower volatility assets, then you might want to look into this investing strategy.

This one’s a lot like income investing. However, it’s not as diversified as I’d like. My strategy uses the same core principle of generating passive income via dividends (and interest), but in many more sectors and asset classes.

Index Investing

Index investing strategies involve constructing a portfolio that replicates the performance of a specific market index, such as the S&P 500.

This strategy aims to achieve broad market exposure and diversification while minimizing costs by investing in index funds or exchange-traded funds (ETFs).

Pros

• Investing in an index fund provides diversification by exposing investors to a broad range of securities within that index. And diversification reduces risk.
• Index funds generally have lower costs compared to managed funds that require active stock picking.
• Index investing is simple. Instead of trying to select individual stocks, you can invest in a single index fund.
• Index investing has historically shown competitive long-term performance compared to managed funds.

Cons

• Doesn’t outperform the market because the strategy and funds aim to replicate the chosen index.
• Income investing lacks flexibility and personal preferences. You can’t take advantage of individual stock opportunities or make tactical shifts. And you have no control over specific holdings within a fund.
• Because this investing strategy mimics the market, there’s no risk management. If the market experiences a significant decline, so does your account.

If you’re looking for a simple, diversified, and hands-off approach, then index investing might be the strategy for you.

I like aspects of this strategy, but can’t get around holding through down markets without any incentives like you get with dividend or income investing strategies.

My strategy includes funds, but none that mimic any indexes. I’m muck more selective with what I put my money into.

Momentum Investing

Momentum investors focus on identifying assets that’ve shown strong recent price performance and expect that trend to continue in the near term.

They buy assets that are trending upwards and sell those that are trending downwards, aiming to profit from short-term price movements.

Pros

• Selects assets that have strong upward price movements to potentially capture high returns in the short to medium term.
• This strategy is easy to implement because you buy assets that have exhibited recent price strength. There’s no complex analysis or in-depth knowledge of fundamental factors.
• This strategy aligns with the “herd mentality” and capitalizes on psychological biases.

Cons

• Because this strategy uses emotional biases of investors, things can change on a dime. Momentum stocks are volatile and sudden reversals can be huge. This method carries higher risk than others.
• Timing is challenging because this strategy tries to utilize momentum signals. They aren’t always accurate.
• Momentum investing focuses on price trends and momentum signals. That means you’re flipping companies that don’t have solid fundamental factors.
• This strategy usually involves more frequent trading which leads to increased transaction costs and taxes that can eat into your profits.

If you’re really good at reading momentum signals, like to ride the trends, and don’t mind more frequent trading, then this might be the strategy for you.

This is probably my least favorite approach, because I struggle with predicting emotions of the masses. I prefer solid fundamental data and a much more hands off appraoch.

My girlfriend got into this type of trading for a while. It takes a long time to learn to get good at it and it’s stressful. She stopped because she was glued to a screen for hours a day and wanted more freedom.

Contrarian Investing

Contrarian investors take positions opposite to the prevailing market sentiment. They look for opportunities in assets that are currently out of favor or experiencing negative sentiment.

Contrarian investors believe that the market can be irrational and seek to take advantage of situations where prices may be temporarily depressed.

Pros

• Investors choose assets that are currently out of favor or undervalued. When they rebound in price or regain popularity there’s a potential for high returns.
• This approach allows investors to buy assets at a discount compared to their intrinsic value.
• Since this type of investing involves going against the herd mentality, there’s less competition for assets.
• This approach has a long-term focus that can help avoid short-term market fluctuations.

Cons

• It’s difficult to accurately predict when a particular asset will bottom out or when market sentiment will shift in favor, so there are timing challenges.
• This strategy can result in extended periods of underperformance, because prices don’t changed until the market sentiment does. This requires patience and conviction.
• There’s a chance that an investor’s viewpoint is wrong. They can develop a contrarian bias, leading them to overlook warning signs or dismiss valid market trends.
• There’s a potential for value traps when assets appear cheap but continue to decline in value or fail to recover.

This strategy looks similar to value investing, except that it doesn’t emphasize choosing assets based on a strong fundamental analysis. It sounds like you have a better pulse on the behavior of investors.

If that sounds good to you, cool man. I may incorporate a few concepts into my strategy when appropriate like buying when prices are down, but I’m pretty confident that the price will go up when I do this.

Income Investing

And last but not least, my favorite strategy.

Income investing aims to generate regular income from various sources, including dividends, interest payments, rental income, or other fixed-income investments.

Income investors often focus on more stable, income-generating assets like bonds, real estate investment trusts (REITs), or dividend stocks.

Pros

• The primary benefit of income investing is the potential to generate a steady stream of income.
• Income-focused investments tend to have lower volatility in their price. This is a big benefit during market downturns.
• This strategy involves diversifying your portfolio across various income-generating assets. This helps to spread out risk.
• By reinvesting the income generated from your investments and using the power of compounding, you can reduce value losses during down markets. Doing this over time, creates long-term wealth.

Cons

• Because this strategy prioritizes income generation rather than capital appreciation, assets and portfolios have a lower growth potential.
• Selling an asset before its maturity date to buy one with a better interest rate can potentially cause a loss in capital.
• There’s a risk of income reduction if a company decides to reduce or eliminate their dividend.
• If you consistently withdraw the income generated from this strategy, there won’t be compounding from reinvesting. So your account will experience a limited capital appreciation.

If you like the idea of income generation, lower price volatility, reduced losses during down markets, and the potential for long term wealth, this strategy is for you.

These are all of the reasons I love income investing and why my strategy’s core is rooted in this approach.

To Sum Things Up

I hope you read through each investing strategy and noted which aspects interest you — and which ones you want to avoid. This is the how you can start formulating an investing strategy to reach your goals.

The strategy I use fits best with income investing, but I incorporate aspects of a lot of the others. I’ve developed techniques to stack multiple benefits while reducing as many negatives as possible.

If you’re interested in learning what that looks like, stick around. I’ve outlined the basic components on the Start Here page, so you can either replicate my strategy or tweak it to suit your preferences.