Have you ever wondered what investing strategies you should use to grow your money? Are you struggling to choose between different investing strategies?

An investing strategy is a plan of action designed to help you achieve your financial goals.

Imagine you are planning a road trip across the country. You know where you want to go, but you're not sure which route to take. You can either take the shorter route that has a lot of detours. Alternatively, you could take the longer route that is more straightforward but more scenic.

The same thing happens in investing. There is no one-size-fits-all approach here. How you want to go about your wealth journey depends on what you're looking to get out of the experience. What works for one person might not work for another. In this podcast episode, we explore popular investing strategies so you won't have to deal with any of the confusing information. We also aim to help you find the one that best fits your investment goals, personal finances, and risk tolerance.

Popular investing strategies

Investors use various strategies to handle risk and improve their chances of earning more money in the long run. There are different strategies that you can use to invest, each with its own pros and cons.

1. Dollar-cost averaging

Dollar-cost averaging (DCA) is one of the most popular investing strategies in the Pearler community. To do this, you put in the same amount of money at the same time, no matter how much the investment costs. This way, you can buy more shares when the price is down. At the same time, you end up getting fewer shares when the price is up.

Let's say you want to invest $100 per month in a particular stock. In the first month, the stock price is $50, so you buy two shares. In the second month, the price has dropped to $25, so you buy four shares. In the third month, the price has gone up to $75, so you buy only 1.33 shares. Over time, this averaging of the cost can lead to a lower overall cost per share.

One major advantage of dollar-cost averaging is that it can help smooth out the ups and downs of the market. As a result, you get more consistent returns over the long term. By investing a fixed amount regularly, you also don't have to worry about timing the market.

The downside is that you could miss out on possible profits if the shares or funds you invest in keep going up in price. Since you are buying at regular intervals, you will be buying fewer shares when the price is high. This can limit your overall gains.

Dollar-cost averaging can be a good fit for those who want to invest but aren't too keen on taking too many risks. But, if you have a lump sum of money to invest, you might be better off investing it all at once for potentially bigger gains. It's all about balancing risk and financial goals to find the right strategy for you.

2. Lump sum investing

On the other hand, lump sum investing means putting all your money in at once, instead of bit by bit over time. This can be good if you think the market is cheap and you want to make the most of the low prices. If you have a 100% share portfolio, the return on this strategy outperformed 75% of the time. For portfolios with 100% bonds, it's 90%.

There is a time when a lump sum is best, like the possibility of getting more money in the end. But, investing a lump sum can also be a tricky decision. Think about how much money you have and what you want to achieve before deciding to do this.

For instance, market changes are more likely to affect your portfolio. If you invest a lump sum in a single stock, you may lose a lot if the investment declines in value. Also, if you invest a lump sum when the market is high, you may miss out on chances to buy assets at a lower price.

Read more on how to invest a lump sum.

3. Buy-and-hold

You’ve probably heard the advice “buy and hold” countless times. You buy an investment, usually shares, and keep them for a long time. Even though the market may go up and down in the short run, shares usually become more valuable over a long time.

This is a popular approach for people who want to invest in companies that have been successful for a long time. Sudden market changes often make less impact on these companies. Established companies also often pay dividends, which can give investors a steady income.

It's important to note that and buy-and-hold investing strategy does not eliminate risk. There is a potential to lose money, especially during market downturns.

4. Dividend investing

Dividend investing is a way to invest in companies that share profits with their shareholders. A dividend is a payment made by a company to its shareholders as a reward for investing in the company. Investors typically receive their dividends quarterly or annually.

There is a benefit to focusing on dividends instead of share prices: it’s called passive income. If the company keeps doing well, you can count on the dividends without needing to sell your shares. This can be helpful for people who have retired or want to supplement their primary income.

Let's say you invest in a company like Coca-Cola, which has a long history of paying dividends (NB: we're only using Coca-Cola as an example. This isn't a recommendation about investing). If you purchase 100 shares of Coca-Cola for $50 per share, your initial investment would be $5,000. If Coca-Cola pays a dividend of $1.50 per share each year, your annual income from the investment would be $150. As time passes, if Coca-Cola pays more dividends and the share price goes up, your investment could become worth more.

Dividend-paying companies like Coca-Cola tend to be more established and stable. So investing in them can provide a level of stability to your portfolio. Even if the stock price drops, you can still receive dividends as long as the company continues to pay them out.

But, it's important to note that dividend investing does come with some risks. Companies might stop paying dividends if they face financial issues. They may also choose to reinvest their earnings instead of sharing them. Moreover, this may not be the best strategy for investors seeking high growth and capital appreciation.

5. Index investing

Index investing is a popular way to adopt a passive approach and simplify your investing strategy. Index investing is about investing in a diverse range of companies and sectors. ASX 200, for example, is an index that has the top 200 companies listed on the Australian Stock Exchange.

Let’s start with the pros. Index investing can help to reduce your risk because you are not investing in a single company. If one company isn't doing well, it won't hurt your entire investment portfolio as much. That’s because you spread your money across all 200 companies, in the case of ASX 200.

Index funds also have cheaper fees because you are not paying a fund manager to pick shares for you. This can help reduce costs and potentially improve long-term returns.

Now let’s talk about the downsides. When you do index investing, you won't get the same returns as if you invested in a single company that did exceptionally well. Another potential downside is that index investing may not match your financial ambitions. If you are looking for high-risk, high-reward investment, then this may not be the best fit for you.

6. ESG investing

ESG stands for Environmental, Social, and Governance. Many investors now want to make sure their investments match their values. That's why investing in ESG has become more popular. This strategy involves investing in companies that prioritise sustainability, social good, and ethical practices.

ESG investing can be more open to interpretation than index investing though. Investors can use ESG ratings and indices to guide them, but they may need to do extra research. They need to be more selective with their investments to make sure they align with their values.

7. Passive vs active investing

When it comes to investing, there are two main approaches: passive and active.

Passive investing means long-term investing in a portfolio of stocks that mirrors a market index. The idea is to capture the overall performance of the market, rather than trying to beat it.

Passive investing is generally considered a lower-risk strategy. Index funds are diversified across a variety of stocks, so the risk is spread out. This makes it a more stable investment. Passive investing is also cheaper and takes less time than actively managing a portfolio.

In contrast, active investing means you pick specific stocks or try to time the market to make money. While active investing can provide high returns, the speculation involved makes it riskier. You need to spend more time and effort researching and managing your portfolio.

8. Asset allocation

Asset allocation means dividing your investments among different types of assets to manage risk. To decide how to divide your money, think about what you want to do with your money. Consider how much risk you can handle and how long you want to keep your money invested.

Let's say you have $10,000 to invest, and you decide to put it all into the ASX 200 index. This means you have 100% of your money invested in Australian stocks. Now, one of the advantages here is that you get exposure to a diverse range of companies and sectors. And this can help to reduce your risk. The downside is that if the stock market takes a dip, you could potentially lose a lot of money.

This is where optimising your asset allocation comes in. You can spread out your risk when you diversify your investments across different assets. You can also potentially earn a more stable return on your investment. The key is to find the right balance of risk and reward based on your financial goals.

Imagine you're a conservative investor who wants to minimise risk. You might divide 75% of your portfolio to bonds and cash, and only 25% to shares. This means that you have less exposure to the stock market and more exposure to less risky investments.

If you have a higher risk tolerance and are looking for growth, you may want to do the opposite. For example, an aggressive investor might allocate 80% of their portfolio to stocks and only 20% to bonds and cash.

Some people also follow the age-based allocation strategy. This means they allocate a certain percentage of bonds and cash to their age. For instance, if you're in your 30s, you might allocate 30% of your portfolio to bonds and cash. This strategy tends to reduce risk as you get closer to retirement.

Make sure to regularly assess your risk tolerance, check your allocation, and adjust as needed. It's a balancing act. But with a bit of planning and a long-term perspective, you can create a portfolio that works for you.

9. Investing timeframes

Investment timeframes refer to how long an investor plans to hold onto an investment. Short-term investing means holding an investment for less than a year. It is often associated with day trading or short-term speculation. Short-term investors who focus on quick profit may keep an eye on market changes to buy and sell assets quickly.

Long-term investing refers to investments that investors hold for more than five years. This type of investing is often associated with buy-and-hold strategies. Long-term investors look at the fundamentals of the assets they invest in. They consider the financial health of a company or the stability of a country's economy.

From our perspective, long-term investing beats short-term trading for several reasons. Namely, a longer horizon lets investors take a more patient mindset about building wealth. This can keep them from making snap decisions based on short-term market changes. It also lets them earn money over time through the power of compounding.

10.Day trading

Day trading means buying and selling shares within the same day. It's a high-risk way of trying to make money from short-term changes in the market. This strategy is not recommended for beginners. You need to do a lot of research and even more speculation to make it work.

We prefer investing for the long term. Historically, it’s been less risky and requires less attention on the market.

11. Value investing

Value investing is the investment philosophy behind Warren Buffet’s fortune. It is when you pick stocks that seem to be worth more than their current price. It's kind of like finding a diamond in the rough. You're looking for stocks that have the potential to shine bright in the future.

With some research and a bit of guessing, value investing can pay off well if you make the right choices. However, it can also be risky if you don't know how to choose the right stocks. That's why it's important to learn first how to research what you want to invest in.

One way to do this is by looking at the company's balance sheet, income statement, and cash flow statement. These documents provide valuable information about the company's assets, liabilities, revenue, and expenses.

Find out your risk tolerance with our quiz

Now, it's your turn! We suggest taking a risk tolerance quiz to understand your risk profile. Based on the results, take note of which investing strategies might be best for you. Your strategy may change over time as your financial situation and goals change. It's good to check your portfolio once in a while and make changes if necessary.

As always, listen to the full episode if you want to hear us cover these investing strategies in detail.