Smart Investment Strategies for New Retail Investors
With over 14.2 million new accounts opened in 2021, the rise of user-friendly trading platforms has certainly made something clear: you don’t have to be a professional to take your chances in the stock market.
But, if the Game Stop case showed the rising power of retailers, you shouldn’t underestimate how much of a high-stake environment the stock market still is. And, without the right investment strategy, your chances of succeeding are slim to none.
Now, learning the ropes of investing is all but easy for newcomers, but rushing in without an investment strategy is the recipe for disaster. So, take your time reviewing the tried-and-tested strategies below.
First Things First: Pick a Beginner-Friendly Investment Tool
The whopping volume of new retail traders has spurred on the appearance of more and more online brokers. But, with so much choice, finding the right investing platform for your needs can be a significant hurdle.
After all, who can you trust with your money? And what would happen to your investments if a website or app goes down?
These are all difficult questions to answer. But you can certainly minimize risks by choosing an established and reputable platform that provides investor protection, low fees, and no account minimum. Online tools such as the SoFi’s investing app are packed with security features, but also cater to beginners, making them a great choice for new retail investors.
The Hands-Off Approach: Buy-and-Hold Investing
If you are looking for a long-term, hands-off approach to trading, buy-and-hold investing might be the strategy you have been looking for.
When choosing this option, you will be looking for an asset with the potential to grow and perform well in the long term. These include rising young stocks, well-run companies, and index funds.
With this strategy, you won’t have to worry about temporary or short-term fluctuations in the market but benefit from the growth of a certain company over decades. Since you’ll be investing most of your capital, make sure to research your chosen stock.
The Hands-On Approach: Active Trading and Momentum Investing
Buy-and-hold can lead to long-term wealth, but what if you are looking to capitalize on today’s market fluctuations? Active trading is certainly a more hands-on approach that requires you to constantly analyze the market.
However, if the current investor sentiment or macroeconomic changes (i.e.: a pandemic or a war) temporarily causes a dip in the market, this strategy allows you to maximize your gains in the short term.
The Low-Risk Approach: Dollar-Cost Averaging
Aside from building a diverse portfolio, opting for the dollar-cost averaging strategy is the smartest investment decision for new retail investors with low risk tolerance.
The dollar-cost averaging strategy takes away the pressure of finding the right moment to invest the entire of your capital. It does so by encouraging you to drip-feed your investable amount at regular intervals throughout time.
For example, instead of betting $9,000 at once, you could choose to invest $375 a month for two years.
The main types of dollar-cost averaging include index investing – or diversifying your portfolio by investing in index funds and ETFs – or growth investing – a more active investing option that allows you to bet on an emerging company’s future growth
This type of investment is done regardless of a certain stock’s current market price and can curb your capital gains – but it also limits volatility risks and financial losses.
The Warren Buffett Approach: Value Investing
If you have long admired Warren Buffett, you are certainly not alone. All new investors have at least once hoped to build long-term wealth by following in his footsteps. But is it really possible? Maybe.
The theory behind Warren Buffett’s approach, known as the Benjamin Graham model of value investing, is replicable, but risky. The idea is to find those stocks with a price far lower than their value and bet on their future growth.
For example, you might be investing in an emerging startup with a bright future, or an established company whose stock prices have temporarily dipped. Ultimately, you’ll be investing in the “underdog” – or those securities that are not currently favored by other investors.
While this strategy can yield impressive returns, you will need to take an active approach, scan the market for emerging opportunities, and have a certain degree of risk tolerance.
Work With an Advisor and Find The Best Strategy for Your Needs
No two investors have the same goals or financial needs. So, just because someone has chosen a certain strategy, it does not mean it would work for you.
A traditional or Robo-advisor can guide you through the various strategies, introduce you to valid alternatives like income or socially responsible investing (SRI), and help you work towards your unique financial goals.