Some investment strategies to get you started
When you’re a new investor, it can be hard to know where to start. You might be asking yourself questions like: what sort of things should I invest in? How often should I invest? When (and how much) should I sell?
It can get a bit overwhelming! But it doesn’t have to be. You can find answers to these questions by following a strategy.
While “strategy” can sound fancy, it is actually quite simple. It’s just a set of broad, overall “rules'' you follow to help achieve your goals. It doesn’t have to be anything complex—rather, it’s just a way of helping you to make decisions.
With that in mind, let’s have a look at a few different strategies.
Dollar-cost averaging
Dollar-cost averaging is when you choose a group of investments and consistently invest the same amount on a regular basis, regardless of what the price is.
Why investors use this approach
The main advantage of this approach is that overtime it can “smooth out” the ups and downs of the share market. If you’re investing every week, you might get a bargain in one week, then pay a slightly higher price the next week, then get something in between in your third week.
The weekly fluctuations matter less as long as the overall trend is in the right direction. So dollar-cost averaging is great if you’re investing for the long term, and you don’t want to try and time the market to get a bargain.
The tradeoffs
The main tradeoff with dollar-cost averaging is that you miss out on the potential upsides of trying to buy at the right time. If you hold onto your money until you think a share’s price is lower than it should be, you may get some really solid returns if you’re right—but if you’re wrong, it’s going to cost you. Timing the market can also be very difficult over the long term!
Blue chip approach
A blue chip approach is exactly what it sounds like! It’s investing a portion of your portfolio in blue chip companies.
A blue chip company is an established public company that’s reasonably stable and has a strong record of steady growth—sometimes going back decades or more! On the Australian Securities Exchange (ASX), the major banks are blue chip companies, as are big retailers like Coles.
Why investors use this approach
A blue chip approach gives you a piece of companies that have positive track records, and are highly liquid (meaning there’s lots of shares being bought and sold every day).
The tradeoffs
Rather than downsides to this approach, just consider how it makes sense within your broader strategy. You can employ more than one strategy across your portfolio. For example, you may want to evaluate if you want to take a blue chip approach alongside other strategies, including high-risk growth opportunities.
Another important consideration is just like with all investing strategies, ‘blue chip’ doesn’t mean ‘sure thing’. Blue chip companies can lose value, and they can even go bust, like Lehman Brothers in 2008.
The risk of this kind of thing happening to you can change depending on how you apply this strategy. Investing all of your money in one blue chip company is higher risk than investing in a selection of blue chip companies, and investing all at once can be higher risk than investing on a regular basis.
Fundamental analysis
Fundamental analysis is investing in companies based on the fundamentals of how those companies are performing. It involves evaluating a company to determine its intrinsic value, like reading annual reports and getting familiar with some key metrics like income, revenue, cash flow, and market capitalisation. With this approach, you’re looking for the factors could influence its price in future.
With fundamental analysis, it’s important to remember that the best anyone can do is make an educated guess. You’ll never be able to predict a company’s future with 100% certainty and past performance does not guarantee future returns. Lots of fundamental investors make educated guesses but ensure they stay diversified as well.
Why investors use this approach
Investors use fundamental analysis to see if their analysis is indicating that a company is undervalued in the market. When investors buy shares based on fundamental analysis, they’re essentially saying that they think a company is underpriced right now and will be worth more in the future. If you’re doing fundamental analysis, you can make this decision based on just a few metrics, or based on hours and hours of research. It’s up to you because, after all, you’re the one making the investment.
The tradeoffs
The main tradeoff with fundamental analysis is that the different factors you analyse may not turn out the way you expect, meaning the intrinsic value isn’t realised. If you’re right, you can make a good return—but if you’re wrong, then the stocks may decrease instead. Just like the normal risk of investing on the stock market.
Technical analysis
Technical analysis is really different from fundamental analysis. People following technical analysis are trying to time the market—they want to buy when things are about to go up, and sell when things are about to go down. This is really hard, and people often get it wrong.
People who follow a technical analysis approach don’t rely on things like annual reports or market research. Instead, they only look at two things: the share’s price over time, and how many shares have been traded over time. Then, they try to find patterns in these two figures to signal an investment’s strength or weakness.
You’ll hear technical analysts talk about things like ‘support’ (when a share’s price is heading down), ‘resistance’ (when a share’s price is heading up), and ‘head and shoulders’.
Why investors use this approach
Investors who use technical analysis are saying that they think past movements in a share’s price are a good predictor of future movements. If they’re right, they get rewarded with solid returns.
The tradeoffs
The main tradeoff here is that you’re trying to time the market perfectly. What’s more, you’re trying to time the market based only on what the share’s price has done in the past—this is not a guarantee about what it’ll do in the future. There’s no set of rules or anything dictating that share prices have to follow a certain pattern.
Making a choice
Now that you have an idea of some of the different approaches, you can make a choice about which one (or combination) best suits you. And remember, you can manage your risk by making sure you’re diversified. If you have a well diversified portfolio, little ups and downs and small failures in parts of it have less of an impact, particularly while you are building that confidence.
So it’s really all about what you want: your risk tolerance, your time horizon, and how much time you want to devote to investing. It’s up to you!
Ok, now for the legal bit
Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. We don’t provide personalised advice or recommendations. Any information we provide is general only and current at the time written. You should consider seeking independent legal, financial, taxation or other advice when considering whether an investment is appropriate for your objectives, financial situation or needs.
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