INVESTING STRATEGIES

Strategy 1: Value Investing

Strategy 2: Growth Investing

Strategy 3: Momentum Investing

Strategy 4: Dollar-Cost Averaging

- Strategy 1: Value Investing

Value investors are bargain shoppers. They seek stocks they believe are undervalued. They look for stocks with prices they believe don’t fully reflect the intrinsic value of the security.

Warren Buffet: The Ultimate Value Investor

But if you are a true value investor, you don't need anyone to convince you need to stay in it for the long run because this strategy is designed around the idea that one should buy businesses—not stocks. That means the investor must consider the big picture, not a temporary knockout performance. People often cite legendary investor Warren Buffet as the epitome of a value investor. He does his homework—sometimes for years. But when he’s ready, he goes all in and is committed for the long-term.

Value Investing Tools

For those who don’t have time to perform exhaustive research, the price-earnings ratio (P/E) has become the primary tool for quickly identifying undervalued or cheap stocks. This is a single number that comes from dividing a stock’s share price by its earnings per share (EPS). A lower P/E ratio signifies you’re paying less per $1 of current earnings. Value investors seek companies with a low P/E ratio.

- Strategy 2: Growth Investing

Rather than look for low-cost deals, growth investors want investments that offer strong upside potential when it comes to the future earnings of stocks. It could be said that a growth investor is often looking for the “next big thing.”

A drawback to growth investing is a lack of dividends. If a company is in growth mode, it often needs capital to sustain its expansion.

Value investing tends to outperform growth investing over the long-term. It's important to keep in mind that at the first sign of a downturn in the economy, growth stocks are often the first to get hit. Growth investors also need to carefully consider the management prowess of a business’s executive team. Growth is of little value if it’s achieved with heavy borrowing.

- Strategy 3: Momentum Investing

Momentum investors ride the wave. They believe winners keep winning and losers keep losing. They look to buy stocks experiencing an uptrend. Because they believe losers continue to drop, they may choose to short-sell those securities. But short-selling is an exceedingly risky practice.

- Strategy 4: Dollar-Cost Averaging

Dollar-cost averaging (DCA) is the practice of making regular investments in the market over time, and is not mutually exclusive to the other methods described above. Rather, it is a means of executing whatever strategy you chose. With DCA, you may choose to put $300 in an investment account every month. This disciplined approach becomes particularly powerful when you use automated features that invest for you. It’s easy to commit to a plan when the process requires almost no oversight.