There are a few common or popular investment strategies that I have encountered in my time spent investing. I believe all of them can be successful for different people based on how effectively they can understand and then apply them.
Trading-a strategy that involves seeking to profit from price fluctuations
The first one that comes to my mind is a strategy that is typically short term and/or focused on buying seemingly undervalued or depressed stocks hoping that the price moves in the direction that you want. This is the strategy that probably gets the most media attention. This is the strategy used by some of the most successful and rich investors.
This strategy could be an active stock/asset picking one that involves using technical analysis and charting to determine a stocks price trend or momentum. Some investors seek to purchase “undervalued” stocks based on business fundamentals like earnings and other metrics. This type of strategy could also revolve around an event such as an earnings or press release or new product launch.
I am not only referring to short term or high frequency trading strategies. The stocks or assets may be held for years or days or minutes depending on the specific strategy but the profit is targeted and expected primarily through price fluctuations. That is what I am referring to and why it is all considered trading in my opinion.
I believe this is one of the most speculative, unpredictable, and least effective way for average investors to approach the market. In my personal attempts at making money this way I was not successful at timing my buys and sells, worried constantly about prices, and actually lost money. Without some stroke of luck (think big win) I could not imagine having any peace of mind in retirement with this investment strategy.
Maybe it is only me?
However, even the media and investment advisors have put out the message that even most professional money managers (mutual funds) active trading and stock picking strategies fail to best an index comprised simply of the largest companies in America. An S+P 500 fund can be purchased for less and in almost every case would have returned more money to investors.
Why would anyone pay a premium price though a higher fee structure for lower performance? Millions do, whether willingly or completely unknowingly.
If the professionals can not beat the index returns consistently then why would the average investor think they can? The advice that would follow that statement would be to invest your money into a broad index fund like the S+P 500 typically through investing a predetermined amount every month or quarter regardless of market valuation.
I believe this is probably the most likely to be successful long term for the average investor. My only hang up here is that at some point you are going to have to time the market. Sequence of returns risk comes to mind for me because the returns will be primary capital gains which requires selling(timing) to capture them.
If you happen to retire or require money when the market is not doing well you could eat into your principle because dividend income is not high with this strategy. Getting money out of the market requires selling opposed to an income focused or dividend growth portfolio that will pay out income while allowing you to continue to hold your stocks.
Dividend Growth Investing
Another popular and successful strategy that comes to my mind is called dividend growth investing. This strategy has grown in popularity since low interest rates have caused typical safe and reliable income sources like treasuries, bank savings and CDs to pay out much less than previously.
This strategy generally focuses more on business fundamentals and dividend payment history and growth rather than short term price fluctuations and usually has a longer term approach. The strategy is focused on creating a growing income stream to fund retirement.
Stocks are researched and added to the portfolio for many reasons but primarily based on expected future or historical dividend growth. Assets are typically purchased with a buy and hold mentality and over time that dividend growth, especially if reinvested, can provide astonishing results.
The only hang up many people have is that they didn’t start early enough for this to be a viable strategy since that compounding process takes time.
I believe this is an effective and easy strategy for most investors to understand and makes planning ahead simpler. This is because most people know or have a solid idea about what expenses they will need to pay for in retirement. For instance if you needed to earn $50,000 a year while you were working you could target that amount or a higher or lower income based off of that.
My personal investment strategy
After experimenting with various investment strategies I decided income investing will be my primary investment strategy going forward. Income investing is an investing strategy designed to create a (semi) passive income stream. Dividend growth is considered but is primarily achieved through reinvesting higher yielding payouts rather than companies that have low payouts and have high growth.
Portfolio income and income growth is the primary focus of the income investor. He or she can focus less on the current value of the portfolio’s stocks since income growth is the goal. This is because returns are expected to come from dividends and distributions received instead of market timing and capital gains. This helps the investor remain calm during market fluctuations by focusing on the more reliable and stable income generation.
My experience trying to buy and flip stocks and attempting to time buys and sells has not worked so great for me in the past. I have gradually decided on a more passive strategy of buying higher yielding assets such as reits, cefs, and bdc type investments as I have capital available and reinvesting dividends to lower my cost basis over time.
Cash is invested quickly to avoid slowing down compounding and at a maximum of twice a year rebalancing/tweaking. The only exception being when adding fresh capital to my portfolio. All my investment is done within IRA accounts. These tax sheltered accounts are an ideal wrapper for this strategy because outside of retirement accounts each dividend received would trigger tax consequences.
I have decided to purchase reits, cefs, and bdc stocks for several reasons. Reits and Bdcs are considered pass through entities and to maintain this tax advantage usually pay out high current dividends at the expense of lower expected growth of that distribution. Closed end funds also utilize leverage at the fund level to boost income and distributions. Currently all my dividends and distributions are reinvested to help grow the income stream over time even when I do not have fresh money to invest.
I believe this strategy is less risky long term when compared to an active trading strategy that relies on market timing and/or luck. I am not relying on business growth or market price timing to fuel my returns. I am simply expecting the company to keep paying out those high dividends/distributions. It has allowed me to remain fully invested and know that with time compounding and reinvesting my income stream will continue to grow in up or down markets.
Since I am only 26 years old I have a lot of time left to invest more before I begin drawing income from my portfolio. While my current portfolio’s forward expected 12 month distribution only totals $2643.21 in the future I expect this income to supplement or replace my working income and will document all progress on this blog.