Value investing can be compared to searching for a bargain but in terms of stocks. Bargain here does not mean cheap, but rather undervalued. This does not mean that you have to go through the financial data of every company listed in the New York Stock Exchange. You can always invest in mutual funds.
A way for starting investors to find undervalued stocks is the price-earnings ratio (P/E). P/E ratio is helpful because a lower P/E ratio implies that you are paying less per one dollar of current earnings. This does not mean that you should only look at this measure though, if companies temporarily inflate their accounting numbers, their P/E ratios might be low but this does not reflect their true value.
Growth investing means focusing on what the value of the company will be in the future and its potential for growth. In some ways, you are looking for the next big thing. This often involves investing in riskier stocks that do not pay dividends. The risks associated with this strategy could also imply that while it can produce profits, it usually performs worse than value investing in reality.
Growth stocks usually perform the best when interest rates are low. On the other hand, growing companies and up and comers are usually the worst hit during a downturn. An important determinant of the firm’s success is also dependent on management: bad management can stunt the growth of companies.
Momentum investing implies a mentality where you expect the past to predict the future of the company. In other words, if the stock is doing well you expect it to continue doing well and if the stock is declining you expect it to continue declining. In practice, mutual funds with this strategy have not been successful even though studies with simulations have shown that it could be a good investing strategy.
Dollar-cost investing, or dollar-cost averaging, is the practice of investing a certain amount of money in a security on a regular basis, regardless of the price you bought it at. Say you have $10,000; your strategy would be to spread out your stock purchases evenly and regularly, buying $1000 worth of a certain security at the top of every month, regardless if the price increases or decreases. This is great for the investor who might be unsure of the performance of a certain stock over a certain period; by dollar-cost-averaging, you are smoothing your price over time and ensuring you aren’t dumping everything into one stock at one time. This is especially powerful in a bear market, where many investors are wary of buying stocks at their lowest point. This means you will invest at these dips, scoring better deals.
Dollar-cost averaging may seem more conservative than a lump-sum purchase of a stock or fund, but the upsides are that you will be able to regulate your emotions while investing, adopt a long-term strategy, and avert mistiming the market. Drawbacks, however, include frequent trading fees and potentially foregoing the benefit of a stock rising quickly.
Buy and hold investing is exactly like how it sounds -- buying a stock and holding it for a long stretch of time. This means going years or even decades without selling. Buy and hold investing relies on a company’s strong fundamentals in management and financial performance and disregarding any type of short-term chaos in the financial market. Buy and hold investing is for the more passive investor, whose financial goals stretch long-term, such as saving up for retirement or for earning more passive income. However, it has proven to give exponential gains and can save the headaches of trying to “time” the market correctly and find the perfect entry point. Research has even shown that by placing your money in an index tracker fund, like the S&P 500, chances are you will beat out 86% of large-cap active fund managers, without even batting an eye. This method requires a lot of self-discipline, however, and is still susceptible to huge market crashes, which can cause portfolios to lose nearly all their gains.
Socially responsible investing (SRI) involves both moral and investment judgment, circling the idea that companies should make long-term financial impact through ethical and sustainable means. These companies do the right thing and are profitable in the process. SRI can be divided into three categories: environmental, social, and governance. Environmental investing involves looking at companies that have low carbon footprints and are protecting the ecosystem. As for social, these companies create safe work environments and treat customers fairly. Massive risks in this case could be hefty lawsuits that may decimate companies’ balance sheets. When it comes to governance, look at the structure. Is the chairman and CEO role separated? Are outside shareholders involved in the board voting process? Is there transparent communication?
Labelled plainly, small cap stocks are made up of companies with small capitalization. Companies are divided into small, mid, and large-cap, and small-cap specifically is made up of companies with market caps of $300 million and $2 billion. Market capitalization is calculated by the company’s number of outstanding shares multiplied by the share price. These companies are small but mighty, carrying a lot of risk but also a lot of potential reward. It is incredibly enticing; after all, you might find the next Google or Microsoft currently in its baby stages! But with every great company out there, there are dozens of bad ones. Be sure to do thorough research on a particular small cap to ensure it will outperform the rest.
A Forbes article from 2019, outlined the following strategies for volatile times: