Saving and Investing

Getting started investing can be daunting, but it doesn't have to be. But what are the best strategies for maximizing returns while minimizing risk? The strategies that individual investors choose depends on their goals, their stage of life, and their risk tolerance. Passive Investing Passive investing strategies typically put your investment portfolio on auto-pilot with minimal oversight on your part. These strategies usually involve some sort of buy-and-hold in conjunction with dollar cost averaging. Index Investing There really is no bad time to invest in an index fund. My favorite is of course VTSAX (ETF: VTI) from Vanguard. Owning an index fund means that the investor's portfolio will mirror the broad market. Matching the market puts you ahead of 94% of professional money managers during the 10-year period from 2000-2020. VTSAX is Vanguard's total stock market index which included ownership in over 3900 publicly traded domestic companies. This is broad market coverage that is also self-cleansing (JL Collins's words, not mine). The bad companies fade away and drop from the index. With dollar cost averaging (DCA), many beginning investors are using the most appropriate tactic for long-term wealth-building success. Many people use the index fund VBTLX (ETF: BND) to ease the volatility of VTSAX as they approach retirement. VBTLX also provides broad market exposure to over 10,000 bond issues. About two-thirds (around $200 billion) of the fund is invested in U.S. government securities. But with a duration of almost 7 years, fund owners should also be mindful of the current rising interest rates environment. Duration is a measure of potential market-specific risk when the Fed moves rates go up. Growth Investing Growth investing seeks capital gains. Early in the "investing career," individuals have more time to ride out the ups and downs of that wild rollercoaster ride known as the stock market. As such, investors in the early stages of life may be more inclined to invest in small-cap companies that they feel are primed for growth. (VBK is probably a good one! See below.) Growth investors also look to what is referred to as "emerging markets." Emerging markets have yet to cut their baby teeth, so many investors believe that this market is ready to experience high growth. Be aware that investors starting later in life will sometimes adopt growth tactics in their investment choices. This may include individual stocks and/or ETFs and funds that focus on high growth companies. A classic example is ETF: VBK (also available as a fund: VSGAX). This is a small cap aggressive growth fund that is riskier than a tradition index fund. Perhaps an ETF like this safer than investing in individual stocks, but could still offer some upside potential for the catch-up investor. By its very nature, growth investing will haves it's ups and downs. But remember... the only people who get hurt on a rollercoaster ride are the ones who try to unbuckle and try to exit the ride before it is finished. So if this is your strategy, be patient and let it work over the course of the next 20-40 years. Income Investing Income investing is typically thought of for people nearing retirement, or who are already in their retirement years. An example of an income stock is a large utility company like ConEd (Consolidated Edison). Large utility companies are not very sexy from a growth standpoint, but they provide reliable dividend income. During retirement years, some investors may actually live off dividends. Without significant income, growth or index investors will seek to apply the 4% Rule. Active Investing This may be more of an intermediate strategy as opposed to a beginner strategy. Active investing requires more experience and much more involvement in the day-to-day (or week-to-week) decisions affecting your portfolio. As a result, buy-and-hold is not always used with this approach. Day Trading Although most day traders lose money, that doesn't stop people from trying to "find a system." Be aware that people selling systems have made their money by selling these systems, not by having expert trading techniques. A pair of business people in one of Coffeezilla's videos are being sued as the FTC says they defrauded wannabe traders out of some $137 million dollars. Swing Trading Similar to day trading, some investors try to identify "swing trade" opportunities. Swing trading is buying (or shorting) an individual stock that the investor believes will go up (or down) in the coming days or weeks. This may involve less risk than day trading, but should probably only be used by experienced investors with deep knowledge of the particular industry. Although maybe not as exciting, the better idea is the dollar cost averaging approach in passive investing with an index fund for 30-40 years. Risk I left the risk section for the end of the active investing discussion. Risk is the possibility that an investor could lose money - possibly 100% of their investment - as a result of investing. Risk is largely dependent on an individual's personal loss aversion. In general, most of us will do far more to avoid loss than we will to pursue gain. Passive investing is far less risky than active investing. However, I think that many would-be investors who were previously unaware of passive investing tactics are happy to learn that they can participate in the money game without crazy risks. When we hear about investing, I think many of us conjure up ideas about perceived mystical knowledge requirements needed to invest successfully. That's just not the case. Having said that, it is important to remember that all investments carry an element of risk.

Mark Noldy

Category: Saving and Investing