Key Points
- The article provides a beginner’s guide to investing, offering a clear and accessible overview of different investment strategies.
- The authors emphasize the importance of starting with a solid foundation of financial education and understanding key investing concepts such as risk, diversification, and asset allocation.
- The article covers several different investment strategies, including:
- Index investing: investing in a diversified portfolio of low-cost index funds or exchange-traded funds (ETFs).
- Active investing: actively managing a portfolio of individual stocks or other securities with the goal of outperforming the market.
- Value investing: focusing on undervalued or overlooked securities with the potential for long-term growth.
- Growth investing: focusing on companies with strong growth potential and investing for long-term capital appreciation.
- The authors provide pros and cons for each investment strategy and offer tips for individuals looking to get started with investing, such as:
- Starting small and gradually increasing investment contributions over time.
- Using automatic contributions to make investing easier and more consistent.
- Seeking out professional advice from a financial advisor if needed.
- Overall, the article offers a helpful starting point for individuals looking to learn about different investment strategies and begin building a long-term investment plan.
By Blaine Thiederman MBA, CFP
Founder and Principal Advisor at Progress Wealth Management
You can build wealth in numerous ways and with every strategy, you’ll find so-called experts arguing that their strategy is the best one and you should believe them.
The problem is, that most financial advisors in Colorado and across the country aren’t unbiased, non-commissioned fiduciaries and they desperately want to get paid. What that means to you is, that it’s hard to know who to trust and feel confident about working with.
This article will explain different approaches to investing and why some are better than others. If you missed our first article in the series, click here to read it.
How this article is organized:
- Why is investing necessary for nearly everyone
- Stocks, bonds, and mutual funds, oh my
- Different types of strategies to grow your money
- The strategy we’ve found makes the most sense based on the evidence
Why Investing is Necessary For Nearly Everyone
Inflation is a household word in 2022. Housing, gas, food, fuel, rent, and utilities are all nearly unaffordable for your average, everyday household in the United States and it doesn’t seem like they’ll be dropping anytime soon. If you aren’t feeling the pinch in this brave new world we’re in; you’re the exception, not the rule.
This isn’t the first time that the United States has felt high inflation and low pay raises and it’s likely it’ll happen again at least once in our lifetimes. The question you should be asking yourself is: “What can we do the ensure that we can afford it if it happens when we’re not working?”.
The simple answer?
- Pay off your debt before you retire
- Save as much as you can in the most tax-efficient way possible
- Be Frugal and Learn To Be Happy with a Simple Life
- Invest whatever you can afford to in the most prudent way given your goals and Risk Tolerance
- Make As Much Money As Possible Without Risking Your Heart Health
… because if you don’t, you could find yourself in poverty in your old age or becoming a burden for your loved ones to care for.
Stocks, Bonds, and Mutual Funds, Oh My
So many people are looking to understand the fastest and most prudent way to grow their savings for all the reasons listed above.
I’ll get questions from my clients like: Should I invest in…
- a rental property?
- Crypto Currency?
- starting a business?
- Oil Rights?
- Beanie Babies and collectibles?
- ?????
The hard part is, that no one knows for sure what the future holds, and, while all of these investments may have done okay in the past, it doesn’t mean we can tell the future by looking backward. I say this jokingly but, if we could make future-looking decisions by only looking at history, divorcees would all return to our ex-spouses because, at one point in time, they were happy together.
When we invest, the quality of our investment decisions depends on what we believe WILL happen (not what has, historically). If you invest purely because a company was run well for 40 years, does that mean you’ll make money? Ask investors in Lehman Brothers what they think of that logic (Lehman Brothers went bankrupt in 2008).
There are a ton of different kinds of investments out there and this will focus on the main 4.
What the heck are stocks?
When you buy stock in a company, you’re becoming a part-owner in the company. You’re entitled to your fair share of distributed profits of the firm and have all sorts of other privileges.
How do these make money? When the company does better, the value of your shares goes UP because you’re entitled to a fair share of distributed profits and as a result, investors are willing to pay more for them. You can sell your shares without restriction whenever you please.
The simplest way to think about it is, what if you bought a house and found an undiscovered oil well on your property. You’d expect that, as a result, your property would be worth a LOT more because it’s able to make a lot of money for whoever buys it.
The difference is, when you buy stock in a company, you’re hoping that instead of finding an oil well, you bought shares of a company that’ll become the next Amazon and potentially more profitable than an oil well would be.
Bonds? I have those with my loved ones. Why do I need them in my portfolio?
Another name for bonds is DEBT but the difference is, that you’re not on the receiving side of it like normal. When you buy a bond, you’re the lender and your debtor (the person who now owes you) is likely a major company or government so they’re likely a bit more reliable than joe schmoe down the street and his empanada business or your uncle Jim who’s got a bad alcohol addiction.
Most all investors need bonds in their portfolio because, to put it simply, when stocks ZIG, Bonds ZAG. As you can see in the image below, there’s an inverse correlation between government bonds and the SP500. Why? Because when investors are scared, they seek safety. Bonds are typically seen as a safer investment because, in order for them to fail, the company or government you lent money to would have to default on the investment. That’s not ideal.
The trick is, when your bonds increase in value as your stocks decrease, you sell some bonds off and buy stocks at a low (or vice-versa). The result is, that you’re buying stocks when they’re low and selling bonds when they’re high. This helps you to rebound faster and not lose as much during bear markets.
The hard part is, what bonds to buy and what percentage of your portfolio should you invest in bonds?
Want more information on bonds and stocks? Click here to get our free Guide on Surviving Stock Market Volatility
Mutual Funds, Managed Portfolios, and Exchange Traded Funds
Because researching the stock and bond market to non-professionals feels like you’re in a grocery store full of jams and the lights off and you have to make a perfect decision else bad things will happen… most people don’t like trying their hand at picking winners or losers (or potentially find out quickly that they made a bad decision and now their future is at risk); they’d rather hire on an investment manager to do it for them, instead.
Some people love being able to delegate all the stock picking, financial planning, and investment management to a third-party professional that basically helps you to put your financial life on autopilot so you get to focus on all the other much more fun stuff. Typically this costs you anywhere from 1-1.5% or a bunch of commissions that they get when they sell you stuff. If they’re a fiduciary, they probably just charge a percentage. At Progress Wealth Management, we charge 1% and it decreases as your balance grows.
Other people prefer to hire a Robo-advisor and still have someone manage their money but don’t want to talk to a professional. At Progress Wealth Management, we also offer an investment management-only option for a discounted fee.
Lastly, some people like to manage their own money. I’ve included a free guide here on what to look for when you’re picking funds out and how to compare different mutual funds and Exchange Traded Funds in the market.
Different Types of Strategies For Managing Your Money
The first thing people think of when they think about investment strategies are exciting movies like “The Big Short”, “Margin Call”, and “The Wolf of Wall Street” among others but in reality, investing is supposed to be about as exciting as doing your taxes. When it’s done right, it’s thoughtful, purposeful, strategic, and more of an analytic puzzle than a gamble.
Stock Picking – Active Management
Typically most stock pickers will start by deciding what their goal is. The most common one is to try and beat some kind of indexes like the S&P500 (which is a basket of 500 stocks from different large companies in the United States) or the MSCI World (which is a basket of 10,000 stocks from around the world).
From there, stock pickers will typically create a broad market strategy. What a broad market strategy includes is, that stock pickers analyze different countries, industries, and sectors to try and understand which sectors will outperform or underperform and either choose to invest in all of them despite this (because the data lies, sometimes) or be overweight (but not preclude) the ones they’re more confident in.
Once they’ve figured out their broad market strategy, they’ll then focus on creating a strategy to figure out how to value what they believe is the “intrinsic value” of each stock that is available in the marketplace. Intrinsic Value is a stock’s “true worth”.
Why? To put it simply, I like to buy my socks, beef, and stocks all on SALE (or at a price lower than what it’s worth). Buying something you intend to resell at a price that’s lower than what it should be priced at is always a good idea so long as you know what it really should be selling at.
Once they’ve bought the stocks they think are most appropriate in the industries, countries, and sectors that they think are most likely to grow at a rate that’s faster than the other available options, they’ll hold those stocks until they’re reached (or preferably exceeded) their intrinsic value (or true worth). These investors will reanalyze every stock typically at least once a quarter when more up-to-date information comes out.
Upsides of Stock Picking
- The possibility of potentially beating the market.
- The ability to be flexible in the industries you invest in (so if you’re not a fan of oil stocks, you don’t have to invest in them).
- The ability to time certain markets (think tech is gonna drop, you can get out easier).
- More flexibility in your tax strategy.
Downsides of Stock Picking
- Across all domestic actively-managed equity funds, 88.4% underperformed over the last 15 years, according to an analysis of the S&P SPIVA report.
- Significantly more time-intensive for the investment manager.
- Typically much higher cost investment management than the passive alternative.
- After fees, the overwhelming majority of active investment strategies aren’t worth their salt.
Passive Investing
This is the boring, Honda Civic of investing strategies. It puts along, is totally unexciting but it does what it’s supposed to do and doesn’t hinge upon the success and skill of the investment manager you hire. Why? You’re buying basically everything and really just investing with the assumption that humanity will grow in the long run.
The argument behind passive investment strategies is that “no one can forecast the future with any certainty, so why try?”. And that’s not exactly wrong.
Upsides of Passive Investing
- Low-Cost Investment Management.
- No Concerns about Bad Stock Picks.
- Simple. Easily Understood.
Downsides of Passive Investing
- Not very exciting.
- Without a financial advisor, you may invest passively but lack the discipline to stay invested.
- May miss out on opportunities to buy undervalued stocks.
- Have to be okay not trying to beat the market.
What goes into passive investing?
The logic behind investing passively is to buy large baskets of stocks and bonds either via individual stocks, mutual funds, or ETFs and hold them despite what the forecasts, valuations, and economic circumstances are.
Most all passive investment strategies require you to invest a certain percentage in large, mid, and small-sized companies within the United States as well as outside of it and in bonds.
By investing in EVERYTHING and remaining disciplined, you won’t miss out as markets appreciate and grow which, on average, they’ve done pretty well.
The Strategy We’ve Found Makes the Most Sense
At Progress Wealth Management, we believe in passive investment. We don’t believe that anyone that tries to pick winners and losers can consistently generate more value than they cost their investors through higher fees and we’re not alone.
Professor Ronald Fink from Chicago Booth recently explained “From an investor’s perspective, it matters little whether managers are skilled or not, because fees eat up much of whatever skill and market-beating ability exists. Before costs and fees, active managers on average beat their benchmarks by .05%. After costs and fees, they underperform the benchmarks by over 1%. Therefore the evidence continues to favor passive investing. “Is it possible to beat the market?” Pastor asks. “Yes.” “Do investors benefit? No.”
It’s up to you at the end of the day if you want a more exciting portfolio or if you want to avoid fees and use the boring, reliable approach but we support Passive Investment Management at Progress Wealth Management and think you should, too.
So, What Now?
If you’d like a complimentary portfolio review, we’re happy to give it. Click here to schedule an appointment with us and we’ll make sure your money is invested the way that makes the most sense given your goals and risk tolerance.
If you’d rather learn more about portfolio management and aren’t ready to chat quite yet, click here to get access to our complimentary investing guides and receive insights that can help you make better decisions on how to manage your money.
