5 Investment Strategies For Beginners in 2024

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Vault’s Viewpoint

• The best investment strategy for beginners depends on your timeline, finances and investing goals.
• Creating a diversified portfolio is the best way to protect yourself from risk.
• Playing the long game and adopting a long-term investing strategy can help you weather short-term market fluctuations and lead to more growth potential.

1. Diversification

Diversification means your portfolio consists of a wide variety of investments. Diversifying your investments limits your exposure to a single asset class and helps protect your portfolio from risk.

The easiest way to start is by diversifying your portfolio across different asset classes. Every asset class comes with its own unique risk and rewards. Here are some examples of different asset classes you can invest in:

• Stocks: A stock represents a share of ownership in a company and the potential for high long-term gains. But investing in the stock market can be volatile, especially when the market isn’t doing well.
• Bonds. Bonds are issued by municipalities, governments and corporations when they want to raise money. A bond is a loan that the organization agrees to pay back with interest by a specific date. Bonds tend to have an inverse relationship with stocks.
• Cash equivalents. Cash equivalents are assets that can quickly be converted into cash like money market accounts, CDs and other types of savings accounts.
• Exchange-traded funds (ETFs). An ETF is a collection of assets, such as stocks, bonds and other securities. ETFs attempt to track an underlying index and are a low-cost way to invest in a variety of different assets.
• Real estate. You can invest in real estate directly by buying a rental property or flipping an investment property. But you can also invest in real estate through real estate investment trusts (REITs) and real estate platforms.
• Cryptocurrencies. Cryptocurrencies are digital assets and can be used to make payments without the need for traditional banking systems. Crypto is a riskier investment compared to stocks and bonds.

You can also diversify your portfolio across different industries and sectors. For example, you can buy stocks from companies in multiple industries, like healthcare, energy and technology. You can also buy an index fund to achieve instant diversification.

2. Investing in Index Funds

An index fund is a mutual fund or ETF that tracks the performance of a specific market index. These funds follow a passive form of investing and don’t buy or sell securities very often.

And since fund managers aren’t actively picking securities, they tend to come with low expense ratios. They also tend to be more tax-efficient than other types of investments and generate fewer capital gains taxes.

The S&P 500 is the most popular index and includes 500 of the top U.S. companies. But there are many different index funds to invest in. Here are the main types to consider:

• Broad market funds: A broad market fund aims to track a broad market index like the S&P 500 or Dow Jones Industrial Average.
• Market cap funds: These index funds invest in companies based on their market capitalization, which refers to the total shares of a company’s stock. These funds typically fall into one of three categories: large-cap, mid-cap and small-cap funds.
• Equal weight funds: An equal weight fund owns the same dollar amount of large and small companies. This equal distribution prevents one or two big companies from making up the majority of the fund’s portfolio.
• Bond funds: A bond fund is a mutual fund that invests solely in bonds. These funds are typically made up of certain types of bonds, like government or municipality bonds. Bond funds can also be classified by their investment-grade quality.
• Sector-based funds: Sector funds are mutual funds or ETFs that focus on a specific market sector. For example, you can find sector funds that invest in energy, real estate and commodities.
• International funds: An international fund invests in non-U.S. stocks and is a great way to diversify your portfolio. But these funds do come with higher costs, fluctuations in currency rates and geopolitical risks.

3. Dollar Cost Averaging

Dollar cost averaging involves buying stocks or funds at regular intervals to spread out your investments over time. For example, let’s say you have $5,000 you want to invest in an index fund that tracks the S&P 500.

After you’ve chosen your fund, you can either invest the full $5,000 at once or dollar cost average it over ten months. If you choose dollar cost averaging, you’ll invest $500 per month until the ten months are up.

Dollar cost averaging can be helpful during a recession since you’ll continue investing when the market is down. Investing in a down market seems counterintuitive, but it’s when many investors score the best deals.

Dollar cost averaging also takes the emotion out of investing and focuses on a long-term strategy. And it can be helpful for individuals who don’t have much money to invest. Instead of waiting until you have a large sum of money saved up, you can begin investing now at small regular intervals.

4. Income Investing

Income investing focuses on building a portfolio that generates a consistent source of income. Income investors prioritize generating ongoing cash flow from their investments as opposed to capital gains from periodically selling their investments.

Here are some different ways you can generate income from your investments:

• Stocks that pay dividends: When you purchase a stock, you become a shareholder in that company. And when the company produces extra revenue, some share the profits with shareholders in the form of dividends. But not all companies offer this benefit so you’ll need to look for stocks that do. Look at the dividend yield and how often the company pays investors when you’re evaluating dividend stocks.
• Bonds or bond funds: When you invest in a bond or bond fund, you’ll receive regular interest payments. Most bonds pay interest to investors twice a year. Your returns will vary depending on the types of bonds you invest in. For example, Treasury bonds are usually the safest but tend to produce the lowest returns while corporate bonds may offer higher yields but tend to be more volatile.
• Real estate: Investing in real estate is another way to produce regular income, whether you own physical property or not. For example, REITs are companies that own and operate income-producing properties and they pay most of the income to investors in the form of dividends.
• Money market accounts: A money market account can be used to generate a modest amount of monthly income. These accounts operate like a checking or savings account and usually come with a debit card and checking-writing ability. But unlike a checking account, they’ll provide monthly interest payments.

5. Buy and Hold

Buy and hold involves buying stocks or other investments and keeping them for a long time, regardless of what happens in the market. This strategy creates a stable portfolio and produces higher returns over time which is why well-known investor Warren Buffett is known for using a buy-and-hold approach.

There are plenty of advantages to buy and hold: It’s a passive form of investing that prioritizes long-term planning and growth. Plus, buying an asset and keeping it for the long run will save you a lot of time and energy.

But there can be an opportunity cost with buy and hold since that asset is tied up for the foreseeable future. Buy and hold takes discipline so if you suspect you’ll be tempted to chase after other investment opportunities, it’s probably not the best choice for you.