What’s the Best Investing Strategy?

by Jun 24, 2021Personal Finance

There are countless investing strategies. To a point, every investment company, every newsletter editor, every investment guru, claims to have a unique strategy that consistently beats the competition. 

Which philosophy is the best is the never-ending topic of hundreds of books, scholarly articles and theses. 

We can’t possibly review every theory out there, so here are a few “mainstream” strategies.

  • Momentum investing relies on the fact that stocks that have gone up for a while, continue to do so. So you base your investment strategy on the fact that an existing market trend is going to continue. You “ride the wave.”

The idea is that as long as investors are interested in that stock, and as long as fundamentals support the stock price, the stock will continue to go up. This strategy tends to be short-term, usually under 6 months.

  • Growth investing is similar to momentum investing in the sense that investors look for investments that offer strong upside potential. They are somewhat different because growth investors tend to invest for the long haul, i.e. longer than momentum investors.

Growth stocks are typically companies with strong earnings that are capable of expanding to meet the increased demand for their products or services. 

They don’t pay a dividend because most of the income is used to fuel the growth.

  • Value investing is based on finding stocks that are underpriced or “cheap,” usually after falling in value. They tend to have low price-to-sales, price-to-earnings and price-to-book value. Because of their low price, they may pay a proportionally large dividend.

The value investor tries to capitalize on inefficiencies in the market, hoping to pick up a bargain before others do. In other words, value investors are bargain shoppers who can smell a good deal when they see one.

  • Insider stocks are those company executives are buying heavily. Why? Presumably because better than anybody else, they know that their company’s stock is undervalued. The idea is that they wouldn’t buy hundreds of thousands of dollars (and sometimes millions) worth of stock if it weren’t to make money.

This is very different from insider trading, which is illegal.

  • Income investing aims at creating a portfolio of high-yield stocks or bonds to generate passive income. The income is usually paid in the form of dividends or interest payments.

With high-yield stocks, you hope that the stock price will maintain itself (or go up) while you enjoy receiving dividends. Otherwise, the price drop may offset the benefits of the dividends… 

With bonds, you hope that the company will not go into default. If it doesn’t, no matter what you paid for the bond, you should get the full price, which is typically $1,000 per bond. 

  • Dollar-Cost Averaging (DCA) is different from the above strategies, but it’s worth mentioning as we define important investing concepts. It certainly is not an either-or decision. You can apply DCA to all of the above styles. If you invest regularly and automatically in an IRA or a 401(k), then you may be Dollar-Cost Averaging without even knowing it!

DCA simply means that you make regular investments over time, no matter what the circumstances are. Stocks could be high or low, you invest the same amount. In effect, you end up buying fewer shares when prices are high, and more when prices are low. Hardly a bad philosophy! 

The opposite of DCA is a lump sum investment. This simply means investing a bunch of money at a given time. This can be a brilliant strategy if you buy at the bottom of the market, or a poor choice if you invest at the peak of a cycle… In other words, it’s either an educated guess or a gamble. 

DCA takes the guesswork out of the equation: you buy no matter what the market does. 

Of course, you don’t necessarily have to learn every strategy, and pick stocks yourself if you don’t enjoy it or don’t have the time to do it (correction: money nerds do this all day long!). There are mutual funds that embrace each one of these strategies. 

Each of these approaches relies on very different metrics. So again, which strategy is best? 

There are studies that prove that every single one of the above strategies does work. Some do better during a bull market. Some work better during a bear market. Some fare better over the long haul. It’s a fact. 

The difficulty lies in knowing which strategy to follow when, and for how long. And that’s an art, honed over years of education and practice. You need to figure out what resonates with you. 

If you have zero time and no desire for stress in your life, then don’t be a day trader. If you prefer to “set it and forget it,” then you should pick investments that fit that philosophy. 

Bottom line: if one strategy were known to work constantly, for all investors, of all ages, in all market climates, we would all know it and we would all make money consistently. 

Alas… this is a myth. This is the reason why you need to educate yourself, so you understand the different concepts out there, and follow those that make sense to you and fit your personal circumstances. 

And of course, the Vet Financial Summit – both the conference and the community – is a great place to continue your financial journey!

Phil Zeltzman, DVM, DACVS
Meredith Jones, DVM
Co-Founders of Veterinary Financial Summit