Best Investment Strategy 2017 | Short and Long-Term Investment Strategies

What Is an Investment Strategy?

What exactly is an investment strategy? Simply put, it is your plan of action when it comes to growing your money, and it varies based on a person’s individual needs. While establishing your investing strategies, there are a few basic components you need to take into consideration.

Goals: Why are you investing? Is it to leverage disposable income to make quick, high returns? Is it to steadily grow your money for security? Perhaps it’s to build a comfortable nest egg so you can live well in retirement. The way you answer these questions impacts your investment strategy and, ultimately, the following points you must take into consideration.

Investment horizon: How long are you planning to hold most of your investments? As mentioned, this is tied to your goals. If you’re in your twenties, and you are investing for retirement, then your long-term investment strategy will be much different than if you had a short-term investment strategy to buy a home in the near future.

Risk tolerance: Your risk tolerance is based on your goals and your time horizon. As you can see, all of these elements are intimately connected. If you are saving for retirement and young, your risk tolerance is relatively high. Generally speaking, this means you can invest in more stocks because you have the time to weather the ups and downs of the market. If you are merely protecting your wealth for a more immediate goal, like going back to school or buying a house, then your risk tolerance is relatively low, and the best short-term investment strategy is a more conservative approach.

Capital needs: If you are planning on investing, you will need to make an honest assessment of your cash flow. Your investment strategy will be negatively affected if you are constantly liquidating in order to cover routine expenses. Additionally, you can also face penalties if you are drawing from tax-favored accounts like a 401(k).

Best Short-Term Investment Strategies: Planning For Goals in the Near Future

Some people require an investment strategy to help them meet an immediate goal. While they may be thinking about retirement, their priorities lie in raising the capital to buy a home, take a long desired trip or go back to school. These individuals are in need of short-term investing strategies to meet their goals.

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IMPORTANT: Do Not Think of Day Trading as the Best Short-Term Investment Strategy

While recent economic events have stripped away much of the glamor and shine associated with Wall Street, there is still an image in the public’s mind of the stock market as a place where people can get rich quick. This can be extraordinarily damaging for people who decide to put all their money in a company only for the stocks to perform badly and subsequently lose all of their money. In a nutshell, gambling with the markets is not one of the best investment strategies.

There are individuals who analyze the markets and conduct what are known as day trades. These traders are also known as speculators. They hold onto stocks for a short period of time – usually less than a day – and either go long or short to make a profit. This investment strategy profits off of market error. Day traders have sophisticated software that helps them track prices and observe trends. Additionally, they can use their own knowledge of the markets and comprehensive analysis to determine when a stock has not been priced correctly and act accordingly.

When day traders notice such “flaws,” they have one of two short-term investing strategies: go long or go short.

If a speculator thinks that a security has been priced too low, he/she will go long. This means that the individual will buy a fair amount of that security. If the price goes up as predicted, he/she can now sell those shares for the new price and make a profit. If the shares were bought for $10 a piece and the prices goes up to $12, the speculator’s investment strategy has reaped a profit of $2 per share.

If a speculator thinks the price of a security will go down, he/she will borrow said stocks from a broker. That individual is responsible for returning those securities to the broker. In exchange for allowing the day trader to borrow the stocks, the broker charges interest. The investment strategy of a day trader engaged in short selling is as follows.

Say the price of the stock is $10, and the day trader thinks the price will fall to $8. He/she will take the borrowed stock, sell it for $10, and wait for the price to fall. Once it has, the individual will buy it back for $8, return the stocks to the broker, and keep the $2 profit. This investment strategy has the potential for a lot of rewards, but it can also mean quite a lot of risk.

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If the price of the stock goes up instead of down, you are now required to pay out of pocket to get those stocks back. Theoretically, you could hope for the best and pray for the stocks to plummet, but you will be losing a lot of money in interest paid to your broker. Moreover, your broker will also be taking note of market activity and may start making margin calls requiring you to either put more cash into your account as collateral or simply return his/her stocks.

Such an investment strategy is even more risky when you consider the fact that your losses can be huge. If you go long and the price rises, you can only lose as much as you originally put in. If you go short, your losses can be way beyond that if the stock price continues to rise and you’re forced to pay the new price to return the stocks.

Many online companies have preyed on Americans’ dreams of get-rich-quick schemes by encouraging them to use their credits cards and small loans for day trades. This is not a smart short-term investment strategy. Most of the successful day trading stories you hear are from people who are exceptionally well-versed in the stock market and understand how it works. Putting the savings you’re building for a down payment on a home or a trip to Europe into speculating, especially when you’re just starting out, is a recipe for disaster.

Don’t Miss: Setting Investment Goals – Complete Guide on Goal-Based Investing (Short & Long-Term)

What Are the Best Short-Term Investing Strategies?

Each individual’s situation differs depending on his/her goals and risk tolerance. Generally speaking, short-term investment goals are meant to meet a need in less than ten years.

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Short-Term Investment Strategy: If You Don’t Have Savings

If you don’t have any savings, your first goal is to invest in building up a nest egg or emergency fund. Typically, this should be about three to six months’ worth of expenses. While this isn’t an exciting investment strategy, it’s a necessary start. Begin by setting up automatic withdrawals from your checking account on the day your pay goes in.

If you really want to get a taste of investing, you can use apps designed for people investing small amounts. Betterment allows users to set up specific goals, like an emergency fund, and uses algorithms to rebalance your investments to stay within your risk level and specific goals. No minimum contribution is needed, and the app is designed for people who seek a “set it and forget it” investment strategy.

Short-Term Investing Strategy: If You Do Have Savings

If you do have savings, your next steps will have to factor in how proactive you want to be about your investments. Perhaps you recognize the importance of investing strategies but couldn’t care less about the entire activity. Unless you have a significant sum of money you are willing to invest, a financial advisor isn’t an option.

You can turn to apps like Betterment, which are helpful in this regard. Vanguard is also a popular option, and the company has a terrific reputation. Keep in mind, though, that most of its mutual funds accounts carry a minimum contribution of $3000. Additionally, if you want to opt for the robo advisor/human advisor mixed service, the minimum contribution is $50,000.

Mutual funds are also a recommended short-term investment strategy. The assets are spread over a number of industries and markets, making them relatively balanced and less prone to risk. As a result, they do not benefit from exponential returns, but they steadily grow your money and protect your wealth.

In addition, the recent transition over to indexed mutual funds (created and popularized by Vanguard) and exchange-traded funds (ETFs) means investors can incorporate these into their investment strategy without taking the hit of steep managing fees.

Short-Term Investing Strategy: Portfolio Allocation

You may be a more proactive investor, so, instead of using apps like Betterment or investing in mutual funds, you prefer to be actively engaged in building your own portfolio.

In this case, a conservative allocation between stocks and bonds is the recommended short-term investing strategy. Putting all of your money in bonds is not going to get you any significant returns. Conversely, betting it all on stocks means when there is a downturn, you will feel the hit more acutely.

The general wisdom is: the shorter your investment horizon, the more you should put in bonds. However, keep in mind that this also depends on how much risk you can afford to take, so divvy your assets up accordingly.

The Best Long-Term Investing Strategies

If you’ve built up some savings, but you have no immediate goals to save for, establishing a long-term investment strategy is in your best interest. If you do eventually decide to make a big purchase, like buy a home, you have an established investment portfolio to tap into. Additionally, if you do not need to make such purchases, you have the benefit of peace of mind knowing you’re taken care of and the security of knowing you can live comfortably in retirement.

Tips for Long-Term Investing Strategies:

Get Started Early

If you have the luxury of considering a long-term investment strategy, it means you’ve got time on your side. Don’t waste it. Even if it means just putting $100 into a retirement investing account or into mutual funds every month, you are at a significant advantage. Even putting money into a savings account has higher returns when you consider the amount of interest earned over the long run. Do not wait for the perfect time to start. Begin with what you can afford, and as you learn more over time, you can adjust your investment strategy.

Invest in What You Know

Many individuals make the mistake of following an investment strategy they do not understand. While it’s great to learn more about different investment vehicles, products, and industries, do not put your money in something you can barely comprehend. A lack of understanding means you’ll be ill-equipped to respond to changes that you should factor into your decision-making. If all you really understand at the moment is stocks and mutual funds, stick to those. Better to park your money in a place where you know what’s happening to it.

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Reap the Rewards of Your Employer’s 401(k) Matching

Contribute to your 401(k) account. Even if you are hesitant, at least contribute the maximum amount that your employer matches. Not doing so is just missing out on easily available retirement money.

Don’t Stifle Your Cash Flow

Nothing derails your long-term investment strategy like constantly dipping into your investments for needed cash. Think of your investment and your cash reserves as two separate entities. Remember to leave savings aside so that you have money you can dip into without interfering with your investments.

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