7 investment strategies for beginners

Before placing any trades, it's important to develop a game plan. That way, your investing decisions are aligned with your financial goals (what you're investing for), time horizon (how long until you want to reach that goal), and risk tolerance (how comfortable you are with the risk of losing money). One or more of these 7 common investment strategies could be an investing approach that works well for you.

What is an investment strategy?

An investment strategy is your plan for buying and selling assets—like individual stocks and bonds or funds—to help you grow your money over time. Your strategy includes specifics about how and when you'll invest and what you'll invest in. Once it's set, sticking to your strategy can give you confidence about your decisions, no matter what markets are doing on a given day.

What to know before choosing an investment strategy

Every good investment strategy accounts for:

1. Your financial goals: To set these, think about why you're investing and how much money you'll need to reach your goal. Maybe you're saving for a down payment on a home or for your retirement. Clarifying your goals sets a finish line to work toward. It could also help you find the best investment account for you, since there are tax-advantaged accounts for certain goals, like funding retirement, education, and health care.
2. Your time horizon: Estimate how long you have until you'll need the money you're saving and investing.
3. Your appetite for risk: More risk could translate to more reward, but not everyone can stomach it. Assessing your risk tolerance means thinking about how comfortable you are with the possibility of losing money on the way to hitting your goal. For instance, you may be comfortable taking on more risk if your goal is far in the future because you have a longer runway to recover from potential market dips. Short timeline for hitting your goal? You may want to reduce investing risk.
4. Your financial foundation: Robust emergency savings could prevent an unexpected bill from knocking your investing strategy off track. Fidelity suggests setting aside at least $1,000 first, then working toward saving 3 to 6 months' worth of expenses. Paying down high-interest debt, like credit card debt, is another priority to weigh when determining when and how much you can invest.

Types of investment strategies

There's no one-size-fits-all investing approach, and there are many popular investment strategies to consider. You could tweak these to meet your needs or even use different strategies on different parts of your portfolio.

Passive investment strategy

With a passive investment strategy, the goal is for your portfolio or a section of it to replicate the performance of a portion of the market or a specific market index. You can implement a passive investment strategy by investing in index funds, which can be mutual funds or exchange-traded funds (ETFs). These funds pool money together from many investors to invest in securities that make up a corresponding index, such as the S&P 500^®.¹

Advantages of a passive investment strategy

1. Easy to implement: Passive investing doesn't require a great deal of research or expertise. Plus, index funds automatically rebalance, saving you from additional work after you invest in them. Note: If you have multiple investments, even if they're multiple index funds, you still might need to rebalance how much money you have in each.
2. Built-in diversification: Index funds typically spread your money across many different investments. This diversification means when some investments are down, others may be up, reducing your risk.
3. Low fees: Passive mutual funds and ETFs typically charge lower expense ratios than actively managed funds, where a fund manager is doing more than just trying to replicate an existing index's performance. Paying less in fees can help your investment gains go further.

Disadvantages of a passive investment strategy

1. Not likely to beat the market: Although an index fund aims to mimic the performance of a specific market index, there's no guarantee the fund will match the index's performance exactly. Even if it does, the market at large might outperform that index.
2. Limited flexibility: You don't control investments in the index fund, so you can't change which securities the fund is invested in.
3. May be too hands-off: While some investors like having less work to do, you might prefer being more involved with your investments.

Growth investment strategy

A growth investment strategy involves identifying individual companies or market sectors that have the potential to grow faster than the general market. Instead of doing the research yourself, you could invest in actively managed funds that aim to outperform the broad market.

Advantages of a growth investment strategy

1. Higher potential returns: A growth investment strategy could give you a chance to outperform the market and potentially net better returns.
2. Access to professional management: Growth investors may be more likely to choose actively managed funds because of the expertise required to identify stocks poised for growth. By investing in an actively managed fund, you gain access to a team of financial professionals who are working to increase your profit potential. As with most investments, you could instead choose to DIY.
3. More control over your investment performance: If you're choosing investments yourself, you're not sitting back and letting the market make decisions for you as with a passive strategy.

Disadvantages of a growth investment strategy

1. Greater risk: With greater potential for growth comes higher risk. That means your investments could perform worse than the general market.
2. Lower chances of dividends: Dividends are small payments that are like a thank-you for investing. Many companies offer these, but growth companies tend to reinvest any profits back into growing their business instead of paying dividends to investors.
3. Higher costs: Growth stocks are typically more expensive than value stocks. If you invest in an actively managed growth fund, you can expect to pay higher fees than if you invest in a passively managed fund.

Value investment strategy

Value investors buy shares of companies that are trading at what they think may be a discount. They look at a company's fundamentals, like financial statements, to identify potential future value relative to its current trading price. The goal is to buy low, hold, and then sell once the market realizes the stock's true worth, which may or may not come to pass. Although many value investors choose to invest in individual companies, others turn to professionally managed value investing funds.

Advantages of a value investment strategy

1. Typically less volatile than growth investments: Value stocks tend to represent established companies with a record of profitability. That may translate to fewer market dips than growth investments.
2. Possible passive income: Unlike growth investments, value investments typically pay dividends. This potential cash flow could help boost your overall returns.
3. Lower cost: As the name implies, value stocks tend to trade at a price that seems low, given the company's earnings and profitability.

Disadvantages of a value investment strategy

1. Can require a longer time horizon: It may take years for an undervalued stock to reach its perceived fair value—if that day ever comes.
2. Can be difficult to identify value: Not every discounted stock is a good deal. By thinking a stock is a “value,” you're going against the market expectation.
3. Can be time-intensive: Unless you're investing in a value fund with a portfolio manager doing the heavy lifting, you're responsible for identifying potential value stocks. That can require a lot of research.

Income investment strategy

An income investment strategy is all about generating consistent cash flow from your assets, usually through dividends or bond interest payments. That's different from strategies that aim to generate gains from price appreciation.

Advantages of an income investing strategy

1. Steady cash flow: Regular payments from dividends or interest could provide predictable income.
2. Can counteract volatility: Having consistent income could help reduce the overall effects of market price movements.
3. Reinvestment opportunities: Instead of pocketing that cash, you could reinvest dividend and interest payments to potentially accelerate gains.

Disadvantages of an income investing strategy

1. Tax implications: If you're investing in a taxable account, like a regular brokerage account, dividend and interest payments are typically subject to taxes. That could cut into your overall returns.
2. No guarantee of dividends: While some companies have multi-decade track records of paying dividends, they have no obligation to continue doing so.
3. Sensitive to interest rate changes: Many income-producing investments, particularly bonds, could lose value when interest rates rise. Inflation could also diminish long-term bond returns.

Strategies to buy investments

The methods you use to buy investments and the accounts you leverage can have a significant impact on your overall returns. Here are 3 common investment-buying strategies to consider:

Tax-smart investing

If you're saving for retirement, health care expenses, or education, tax-advantaged accounts such as 401(k)s, individual retirement accounts (IRAs), 529s, and health savings accounts (HSAs) could help you save on taxes. They each could offer tax-deductible contributions, tax-deferred (or tax-exempt) growth, and/or tax-free withdrawals. Even in taxable accounts, there are ways to save on taxes, including tax-loss harvesting. That's when you sell investments at a loss to help offset capital gains taxes on investments you sold for a profit. You could also make sure you're optimizing asset location, aka choosing the most advantageous accounts for different asset types.

Advantages of tax-smart investing

1. Keeping more money for yourself: The less you pay in taxes, the more money you have for investing.
2. Motivation to leave money in some tax-advantaged accounts: For instance, holding off until age 59½ to withdraw from Roth retirement accounts could mean tax-free withdrawals—even on earnings—if other conditions are met. Even in non-Roth accounts, your withdrawals may be taxed at a lower rate in retirement than in your higher-income working days. Waiting to withdraw gives your money more opportunity to potentially grow and compound, which is when your returns earn returns of their own.
3. Lower tax rates on long-held gains: Keeping investments for more than a year generally results in paying a more favorable long-term capital gains tax rate. Selling investments in a year or less typically means paying the higher short-term capital gains tax.
4. Potentially lower taxes now: If you contribute to tax-deductible accounts, you may be able to reduce your taxable income and therefore the taxes you owe.

Disadvantages of tax-smart investing

1. Needing many different accounts: A single tax-advantaged account doesn't confer the same benefits for all goals. You may need to contribute to multiple accounts to maximize tax benefits.
2. Contribution limits: Even if you expect to need more money for your goal, the IRS sets limits on how much you can contribute to tax-advantaged accounts, though you can contribute an unlimited amount to a taxable brokerage account and take advantage of tax-loss harvesting.
3. Limited access to your money: If you save and invest for retirement in a tax-advantaged account like a traditional 401(k) or IRA, you may have to wait until age 59½ to get penalty-free access to that money. With a 529 education savings plan or HSA, tax-free withdrawals only apply if the money is used to cover qualified expenses.
4. Complexity: Strategies such as tax-loss harvesting can require a good amount of planning and tax knowledge. You may need the help of a financial professional to ensure you're making cost-effective moves. Fidelity customers could benefit from using Fidelity's tax-loss harvesting toolLog In Required, and Fidelity Go^® robo advisor customers with at least $25,000 in their account get tax-loss harvesting help for their taxable accounts.

Lump-sum investing

Lump-sum investing is when you invest a large amount of money all at once instead of contributing smaller amounts over time. Some people choose to lump-sum invest when they receive a windfall, like from a work bonus, inheritance, or tax refund.

Advantages to lump-sum investing

1. Potentially higher returns: Though past performance doesn't guarantee future results and everyone's portfolio is different, lump-sum investing could result in better returns than dollar-cost averaging.
2. Simplicity: With lump-sum investing, there's no contribution schedule to set up.

Disadvantages to lump-sum investing

1. Elevated risk: Investing a large amount at once multiplies your exposure to immediate market conditions. You must be comfortable with potential short-term swings on the cash you invested.
2. Can be emotionally difficult: Poor short-term performance after you initially invest all that money may discourage you even if your long-term plan is still on track.
3. Might limit your available cash: Putting a large sum of money in the market means you have less easily accessible cash. So make sure you have enough money on hand to cover unexpected expenses.

Recurring investing

This involves investing money in set increments, such as a percentage of each paycheck, on a predetermined schedule, such as weekly, biweekly, or monthly, hence the name recurring investment. Instead of investing all at once (and having a single-entry price), you invest gradually and consistently over time, a strategy also called dollar-cost averaging.

Advantages of recurring investing

1. Simple and hands-off: Automating your investments means you've already chosen to invest a certain amount on a certain schedule. This can help you avoid reactive decision-making if markets turn volatile.
2. Could lower your average cost: Dollar-cost averaging could help you spend less per share in the long run when compared to investing a lump sum.
3. Builds long-term consistency: This strategy could get you in the habit of routinely investing. Repeated investing could potentially lead to steady gains.

Disadvantages to recurring investing

1. Potential transaction costs: If your brokerage charges commissions or transaction fees, splitting your investment into many trades could be pricey.
2. Requires commitment: Recurring investing only works if you stick to the plan, regardless of what's happening in the market. It can be tempting to stray off course if emotions are running high.
3. Could spend more: By investing in equal increments over time, you're averaging your entry price. If the price of the stock or fund you're repeatedly buying increases over time, you could end up spending more per share on average.