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Before you begin to research your investment strategy, it’s important to gather some basic information about your financial situation. Ask yourself these key questions:
- What is your current financial situation?
- What is your cost of living including monthly expenses and debts?
- How much can you afford to invest—both initially and on an on-going basis?
Even though you don’t need a lot of money to get started, you shouldn’t get start if you can’t afford to do so. If you have a lot of debts or other obligations, consider the impact investing will have on your situation before you start putting money aside.
Make sure you can afford to invest before you actually start putting money away.
Next, set out your goals. Everyone has different needs, so you should determine what yours are. Are you intending to save for retirement? Are you looking to make big purchases like a home or car in the future? Or are you saving for your or your children’s education? This will help you narrow down a strategy.
Figure out what your risk tolerance is. This is normally determined by several key factors including your age, income, and how long you have until you retire. Technically, the younger you are, the more risk you can take on. More risk means higher returns, while lower risk means the gains won’t be realized as quickly. But keep in mind, high-risk investments also mean there’s a greater potential for losses as well.
Finally, learn the basics. It’s a good idea to have a basic understanding of what you’re getting into so you’re not investing blindly. Ask questions. And read on to learn about some of the key strategies out there.
Graham’s Five Investment Strategies
In 1949, Benjamin Graham identified five strategies for common stock investing in “The Intelligent Investor.”
- General trading. The investor predicts and participates in the moves of the market similar to dollar-cost averaging.
- Selective trading. The investor picks stocks that they expect will do well in the market over the short term; a year, for example.
- Buying cheap and selling dear. The investor enters the market when prices low and sells a stock when the prices are high.
- Long-pull selection. The investor selects stocks that they expect to grow quicker than other stocks over a period of years.
- Bargain purchases. The investor selects stocks that are priced below their true value as measured by some techniques.
Graham emphasized that every investor must decide how they want to manage their portfolio. Experienced investors may prefer and be comfortable with a buy low and sell high strategy, whereas investors who have less time to research and follow the market might benefit more from investing in funds that track the market and adopt a long-term view.
There is no right way to manage a portfolio, but investors should behave rationally by using facts and data to back up decisions by attempting to reduce risk and maintain sufficient liquidity.