Investing is the best way to turn your savings into real wealth. For most people, smart investing is key to saving for everything from a house to a comfortable retirement.
But there are a lot of different ways to invest. Investors can be extremely active and use high-risk, high-reward strategies in order to build wealth very quickly. On the other hand, investors may choose to use a hands-off “buy and hold” strategy or another more passive investment strategy in order to build wealth slowly and with minimal risk.
Deciding which investment strategy is best for you is an important first step in building wealth through investment. But how can you find the right strategy? The key is to know which questions to ask. Here are a few to start with.
How risk-tolerant are you?
In investing, risk and reward are tied together. More volatile stocks move more quickly in both directions: investors can lose or gain a lot quickly if they target riskier stocks.
That’s not to say that investors can’t control their profits with smart strategies and good fundamentals. But make no mistake: there’s no risk-free stock investing strategy, and the most profitable strategies will also come with the most risk. Before you implement your stock investing strategy, you should consider how much risk you’re willing to take on. If risk thrills you and you have lots of time to invest, you may want to be aggressive. A more passive strategy will make sense if you’re risk-averse and want to retire soon.
How long do you have to build wealth?
Speaking of retiring soon: how long do you have before you want to use the cash you earn investing? The further away your retirement date is, the more time you’ll have to build wealth — and the more time you’ll have to recover from dips in the market. On the other hand, a looming retirement date may inspire you to use a more conservative investment strategy. Rapid changes to your financial situation can be disruptive when you’re trying to retire and need to count on steady income. When you’re saving for retirement, age and risk tolerance are related.
Do you want your investment strategy to have moral or political priorities?
Your financial priorities are extremely important to your stock strategy decisions, but they’re not the only consideration. It is also possible to bring personal moral and political convictions into your investment philosophy.
Some investors choose to invest in companies that they believe in ethically. These investors may avoid stock in companies that, in the opinion of these investors, are harmful to the environment, workers, or others.
Of course, you don’t have to have strong political convictions in order to make money on stocks: how you feel about oil companies can be irrelevant to your oil trading strategy. In fact, political and moral convictions can limit your options as you trade, and there is some evidence that the strategies don’t do much good for the world, either.
However, it’s important to some investors to build wealth in a way that they can believe in, and there’s nothing wrong with having those sorts of convictions. Don’t be afraid to put your money where your mouth is if you feel strongly about something. You’ll find plenty of resources for ethical investors online.
How much time can you commit to trading stocks?
There are lots of different investment strategies out there, but we can sort them into two broad categories: active and passive. There are shades of gray, of course, but active investments strategies are generally considered to be those that require lots of attention and involve lots of trades. Passive strategies, like buy and hold, are more of the “set it and forget it” variety.
Choosing which type of strategy to use means asking yourself how much time you can commit to investing. Day traders will use active strategies, because they’re doing this full-time; others may opt for more passive techniques.