When you look at the characteristics that define history’s most successful investors, you’ll notice they have one thing in common: each followed an investing strategy. Warren Buffett and Benjamin Graham, for example, have become synonymous with value investing. Thomas Rowe, growth investing. These billionaires didn’t just throw money in the wind and hoped it came back doubled. They set out with a clear plan, and they followed it even when the market became shaky.
Whether you’re just starting out, or you’ve been investing for a while, it’s always good to follow a clear investing strategy. If you don’t have one, don’t worry: below we’ll break down the most common ones in detail, helping you choose the right one(s) for you.
Best investing strategies for Canadians
An investing strategy is simply a plan of action that’s designed to help you pick the best investments for your goals, values, and risk tolerance.
Below are five of the most common investing strategies for Canadians. Though you can certainly follow one strictly, feel free to combine elements of different strategies if it feels right (for instance, socially responsible investing with index investing). The goal here is simply to find an investing strategy or combination that works for you, then stick with it.
Growth investing is a strategy that focuses on investing in rapidly expanding and newly emerging companies. As a growth investor, you look for companies that have impressive, and potentially industry-disrupting, products and services. Your goal is to buy shares while the price is relatively low. If the growth company reaches its potential, shares will go up, helping you secure a hefty earning.
In recent years, many tech companies have fallen into the growth stock category. The allure behind tech stocks is that their companies will offer a new product or service that better fits consumer’s needs and radically changes the face of the industry or market.
To be clear, growth investing is an active investing strategy. You’ll most likely analyze a company’s data using balance sheets and financial statements. You’ll also need to have above-average knowledge of the stock the growth stock operates in. Both of these will help you evaluate the company, helping you decide if the company has potential, or if it’s over-inflated.
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Similar to growth stock investing, value investors look to buy stocks that are priced lower than they should be. But, instead of having an eye toward future explosive growth, value investors are simply looking for a bargain.
Value investors focus on companies whose stocks are undervalued. These companies could have growth potential. Or they could simply have slowed down over the years. Either way, value investors believe the company’s stock is lower than the company is actually worth. They buy shares with the hope that the market will eventually recognize the company’s real value, helping value investors ride a positive wave up.
Again, value investing is an active investing strategy. You’ll analyze financial statements and compare a company’s assets, revenue, cash flow, and debts with its current stock price. You’ll need to be patient, as value stocks don’t always just fall into your hands, and you’ll probably be scanning the market frequently for a bargain. But if you spot quality value stocks, you could secure some lucrative returns.
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Investing in funds
Both growth and value investing are active investing strategies. They involve time, research, and a fair amount of knowledge. If that sounds like too much for you right now, you have a much less time-consuming option: index investing.
Index investing involves buying shares in a market index, such as the S&P/TSX Composite Index. These indices contain shares of certain companies, usually in a specific sector or industry. The fund then tracks the performance of these companies, rewarding you when the bulk of them hits green.
With an index fund, you can buy a basket of investments for one price. You won’t have to worry about hand-picking these companies yourself. So long as you know what index you want to follow, you can buy a share, sit back, and let the fund’s manager do the work for you.
Similar to an index fund is the exchange-traded fund (ETFs). ETFs work almost identically to index funds: you pick an index to follow, and the ETF will mirror its performance. The difference: an ETF can be traded on an exchange during market hours, whereas an index fund can only be traded once the market closes.
Another type of fund is a mutual fund. While index fund managers track the performance of an index, mutual fund managers try to beat it. For this reason, many consider mutual funds to be a more active investing approach. Like index funds, you won’t have to hand-pick stocks: your fund manager will take care of that.
A dividend investing strategy focuses on buying stocks that pay out a regular cash dividend. These stocks are typically well-established companies with a long history of success. For that reason, many consider dividend investing to be a less risky investing strategy, as these company’s shares experience less volatility than, say, growth stocks.
Of course, dividend investing has its risks, too. A company could hypothetically decrease its dividend if it experiences financial hardship. At the worst, it could discontinue its dividend program. But if you do research at the front end, evaluating a dividend stock’s payout history and dividend yield, you can successfully pick quality dividend stocks.
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Many investors don’t want to just “earn” money on investments. They want to put their money in companies who will make a positive change in the world. If that sounds like something you want, you could engage in socially responsible investing.
As a value-based investor, you examine a company not just by its financial performance but also its business practices, leadership, and resource management. The goal is to pick companies that will grow their revenue, while also engaging in practices that align with your values.
One branch of value-based investing is ESG investing. ESG stands for Environment, Social, and Governance. ESG investors believe that, over the long-haul, the most successful companies are those that will have a positive impact on the environment, treat their employees right, and employ diverse and generally altruistic leaders who guide the company in the right direction.
Just starting investing? Keep these principles in mind
The investing strategies discussed above will give you an investing style, as well as a clear plan to attack the market. For those Canadians who are just starting to invest there are some basic concepts to consider first. Here are five tenets that can help you start investing right.
Pick the right investing account
Everyone has to start somewhere. And, for nearly every Canadian, that “somewhere” is with an online brokerage or through an employer.
When it comes to retirement accounts, you have options. You can open a Registered Retirement Savings Plan (RRSP), which will allow you to invest pre-tax dollars with a tax-deferred benefit. You could also open a Tax-Free Savings Account (TFSA). With a TFSA, you can invest after-tax dollars and avoid paying taxes on investment earnings altogether.
Some Canadians may have the option to open a Group RRSP through an employer. If so, consider starting there, especially if your employer offers a contribution match. Otherwise, you can open an RRSP, a TFSA, or a non-registered retirement account through an online brokerage.
Once you open a retirement account and brokerage, you can start funding your account and buying investments. One great practice to establish, especially in the beginning, is to put money aside regularly. By investing consistently, you’ll create a snowball effect in your portfolio, adding more and more money, which, with eventual gains, creates momentum.
Once you open your account, then you can start putting money inside it. A good method for first-timers is dollar-cost averaging. With dollar-cost averaging, you allocate a certain amount of money toward investing every period (weekly, monthly, yearly). You might, for instance, put $200 towards investments biweekly, or you could set a certain amount, say $5,000, to put in every year. The amount of money you allocate doesn’t matter as much as the practice. The idea is that by investing consistently, you’ll grow your savings over time.
Diversification is the practice of holding investments from different market sectors and asset classes (bonds, real estate, currencies) to minimize risks and maximize gains. A properly diversified portfolio could give you enough exposure to the market, while also helping you hedge volatility with safer investments.
Diversification involves two things: picking stocks from different sectors, risk portfolios, and countries, as well as mixing different investments, such as bonds, real estate, commodities, and currencies. Diversification can also involve combining different investment strategies, using growth, value, and dividend investing to create a well mixed portfolio.
Invest for the long-term
When you’re just starting out, it can be easy to get wrapped up in dreams of getting rich quickly. As attractive as that narrative is, history shows the opposite is true. The most dependable way to build wealth through your investments is to hold them for the long-haul.
With this long-term perspective, you don’t have to worry about timing the market or selling at just the right moment. Instead you find quality investments that will stand the test of time, helping you accrue money slowly but surely.
As the Oracle of Omaha, Warren Buffett, has often advised: when it comes to investing, never buy something you don’t understand. That means both the mechanics behind certain asset classes (for example, understanding how a stock works), as well as the details behind the companies or sectors you plan to invest in.
As an individual, this might sound time-consuming. But your investing education doesn’t have to be a one-night cram reminiscent of a college exam night. You can educate yourself slowly by reading our resources on investing. As you read more material, and as you practice investing, you’ll start to get the hang of terms, principles, and best practices to aid your own investing strategy.
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