Today’s Investing 101 introduces investors to five basic investment strategies for beginners.

As investors digest the information, bear in mind that there is no one best investment strategy.

The truth is that markets ebb and flow and investors are not as rational as we would like to think. We may become overly optimistic when times are good and overly pessimistic when the economy and markets lose steam.

When the unexpected happens, remain calm. Remember Warren Buffett’s golden advice, “Be fearful when others are greedy and greedy when others are fearful.” Greed drives asset prices up while fear causes asset prices to dip. As counterintuitive as it sounds, economic downturns could be perfect buying opportunities!

Being aware of these fundamental investment strategies can help investors develop a go-to investing approach. Investors may even combine strategies, depending on market conditions and their investment goals.

Let’s begin!

1. Dollar-cost averaging

Dollar-cost averaging is a strategy where small amounts of money are invested regularly in an asset. For instance, investing $100 every month in a stock for a year is a form of dollar-cost averaging. Investors buy more of the stock when prices are low and then cut purchases when prices are high. Due to an investors commitment to make consistent investments, their price per share eventually averages out.

To maximise returns with dollar-cost averaging, investors could invest more regularly when opportunities arise and cut back when prices rebound. Opportunities arise when prices dip or when markets crash.

Over time, dollar-cost averaging reduces exposure to price volatility. Investors no longer try to predict market movements. Instead, they are in it for the long haul.

2. Diversification

Diversifying investments means buying assets in different asset classes or across industries and markets.

An investors asset holdings should ideally not dip together when times are bad. Instead, investors want to hold some assets that will still stay profitable even when other asset prices are down.

For instance, if a pandemic hits air travel and causes airline stocks to nosedive, airline stocks will likely dip across the board. If an investor have not diversified their portfolio, they would book losses from all their investments!

Diversification makes an investment portfolio more resistant to singular events.

This is one reason why ETFs are useful? They are one way of diversifying  investments. An example of an ETF is the SPDR S&P 500, which tracks the S&P’s 500 large- and mid-cap US stocks.

3. Rule of 40 for stock picking

If a software company is in its initial growth stage, most of its profits are probably reinvested back in the business. This is because new businesses need to spend a fair bit of money to build market share so that they have the critical mass to turn profitable at some point. That being the case, how does an investor decide whether to purchase its stock?

The Rule of 40 can help. Under the rule, investors may invest in this software company if its revenue growth rate and profit margins add up to more than 40%.

4. Technical analysis

Basic knowledge of technical analysis is useful for all investors. Technical charts can help verify what financial analysis concludes about an asset or market trends.

Charts provide data on historical performance and the information extrapolated can provide some indication of how prices will move in the short term.

Stock investors can also apply technical analysis to different stocks to evaluate recent price movements, and therefore, infer their relative strengths and weaknesses.

Again, bear in mind that chart predictions are not foolproof. Over the long term, they are subject to even more unpredictable variables. Mostly, technical analysis aids in short-term analysis and less so for longer time horizons.

5. 4-3-2-1 budgeting rule

As new investors, how do we decide the amount to save or invest?

The 4-3-2-1 framework provides a simple guideline. It limits investors  spending in each category. Under this framework, 40% of the budget should go to daily expenses, 30% to loan repayments, 20% to savings or investments, and finally, 10% to insurance.

The 4-3-2-1 budgeting rule can help investors decide how much to invest each month!

To recap, these are the 5 basic investment strategies:

1. Dollar-cost averaging
2. Diversification
3. Rule of 40 for stock picking
4. Technical analysis
5. 4-3-2-1 budgeting rule

There is no cookie-cutter investment approach for all investors. Investors have to make a judgment call based on all the information that is available to them. The 5 strategies are also not mutually exclusive and investors may mix and match for their optimal investment outcomes.

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