You don't have to have a strategy in order to invest. But with the right strategy, you can make investing a whole lot easier — and more profitable.
The problem is that everywhere you turn, you see someone telling you that their strategy is the best one — and in some cases, the only one that will make you successful. With so many different ways to profit from shares, how do you decide which one is right for you?
Plenty of right answers
Perhaps the most amazing thing about investing in shares is how many different ways there are to make money. Let's take a brief look at some of the popular strategies many investors use:
Large-cap investors seek the stability of established companies with proven track records. Shares like Woolworths (ASX: WOW) and Westfield (ASX: WDC) have their fastest growth phase behind them now, but shareholders don't have to worry about them going belly-up anytime soon.
Value investors look for shares that trade at attractive prices. Like a bargain shopper waking up at 4 a.m. on Boxing Day, value investors hope to snag bargains by buying out-of-favour shares. While some beaten-down companies never recover, others, such as Flight Centre (ASX: FLT) provide stellar returns when they come back.
Growth investors focus more on companies with strong prospects for the future. Although they prefer not to pay too much, growth investors are willing to pay up for the most promising businesses. Seek (ASX: SEK) is a good example, with sales growing from $26m in 2003 to $280m in 2010.
Dividend investors value shares that pay them back with generous income streams. Dividend-paying shares like Commonwealth Bank (ASX: CBA) won't always show big price jumps. But over time, dividend investors hope to outpace their counterparts.
Small-cap investors look beyond the security of blue-chip shares to find undiscovered companies that have the potential to become the household names of tomorrow. While this strategy is somewhat riskier, small-cap investors expect the profits from their successes to outweigh the losses from failures.
What's right for you?
Stereotypes aside, however, your first investing strategy should reflect a mix of your financial goals and personal preferences. Here are some guidelines:
If you're nervous about shares, get your feet wet with a conservative strategy like value or dividend investing. The margin of safety in value shares and the steady income of dividend shares both absorb some of the shocks of market downturns.
The younger you are, the more risk you can afford to take. Those in their 20s, for instance, might want to maximize their potential returns with growth or small-cap investing. As you get closer to needing the money you're investing, moving to regular large-cap shares or more conservative strategies makes sense.
Last, although many investors identify most closely with a particular strategy, bear in mind that a well-diversified portfolio uses many strategies. Over time, you can learn about all of these strategies, helping you figure out which ones you do best with.
The best investing strategy is the one that will bring you the most success. Start with one that matches your goals, but keep an open mind as you gain experience — you might find another strategy that suits you better.
Of the companies mentioned above, Bruce Jackson has a beneficial interest in Commonwealth Bank and Woolworths. Check out The Motley Fool's disclosure policy.
