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The stock market can be intimidating. Regardless if you’re a seasoned investor, or just getting started, there are endless investing strategies, and it’s hard to find out which one is best. In this article we are going to explore considerations as to where investments can be held and entities that can be traded. From there, we are going to dig into 5 key investing strategies to find what’s right for you:
- Day Trading
- Swing Trading
- Growth Investing
- Value Investing
- Fund Investing
By the end of the article you should be on your way to implementing the right strategy for you.
Before we get into it, I want to highlight that there are two key levers to pull with investing: difficulty (skill and time) and returns. There are much more difficult strategies that present the possibility of outsize returns (i.e. beating the market). Or there are very easy strategies that will give you average returns (i.e. matching the market). In all my reading and experience in the stock market, easy and outsized returns are incredibly rare. Make sure you do your research and are not just making someone else rich by paying for their program.
Where Investments are Held is a Key to Investing Strategies
Before we get into the key investing strategies, it’s important to consider where your investments are held. Tax can very quickly eat into your gains from investing. Where possible, take advantage of your tax advantaged accounts.
In Canada, we have a number of registered accounts that are tax advantaged. This includes the tax-deferred RRSP, the purpose-driven RESP or FHSA, or my personal favourite: the Tax-free savings account (TFSA). These accounts allow you to open accounts and invest with less/no tax on the gains. This advantage of course comes with restrictions – see the articles linked for more info.
In the U.S., there are similar products offered, including the 401k or the IRA accounts. Similarly these accounts are tax-advantaged, but have restrictions on how they can be used.
By being thoughtful about where you’re housing your investments, you can reduce the tax paid on gains, and allow your money to compound. That said, some of the more active trading strategies may be exempt from these tax advantages, so take that into consideration.
Investments Vehicles
There are endless different vehicles for investing/trading. There are classic securities like stocks and bonds, there are derivatives such as options or futures, there are currencies such as foreign currencies or cryptocurrency, or there are commodities such as gold or silver.
The most commonly seen, and the topic of this article is stocks and bonds. All the other vehicles listed are typically more advanced. I would encourage you to be experienced with the basics before pursuing any of those. As Warren Buffet says, “invest in what you know” – make sure you fully understand the vehicle(s) you’re using when exploring the key investing strategies.
5 Key Investing Strategies
There are a lot of ways to classify investing strategies, but I find the easiest place to start is by the duration the security is held. Note that there are also sub-strategies (e.g. technical analysis) and niches (e.g. focusing on a specific industry) within each broad strategy. This is just the tip of the iceberg; it will take some trial and error to find exactly what’s right for you.
For each investing strategy, I’ve outlined the amount of upfront learning, how much active involvement it takes, and the advantages and disadvantages.
Day Trading
Day trading is classified as buying and selling securities while the market is open, but never holding positions overnight. What this means is that you will start and end each day with a blank slate – no stocks held. This strategy is often touted as a way to get rich quickly, but don’t be fooled. Day trading is not an easy thing to have success in, and you should expect to lose a lot of money before you have sustained success.
Day Trading Summary
| Upfront Learning | High – Lots of study and lost money before you can achieve sustained success |
| Active Involvement | Very High – To make money day trading, you need to be actively trading during market hours (meaning it’s incredibly difficult to do with another job). There also needs to be a lot of reflection on previous trades to learn from your actions. |
| Advantages | – Fast paced, very exciting – Gains can compound quickly – Very fast feedback – You know very quickly if a trade was successful or not. |
| Disadvantages | – High potential for lost money – Just as gains can compound, so can losses, leading to blowing up an account. – Hard work and high risk – You may find a sub-strategy that works but the market may change and it will stop working. You need to be very adaptive. You also need to devote a lot of time. – Cannot be done in tax-advantaged accounts – This is considered an active income and likely will not fit the criteria for the registered programs |
| Resources | – How to Day Trade for a Living – Andrew Aziz – Advance Techniques in Day Trading – Andrew Aziz |
Overall, of the key investing strategies, Day Trading is the most active. It is a high-risk high-reward endeavour, with a high possibility of losing money before you figure it out. But if you’ve got the time and desire excitement, this could be an interesting pursuit.
Swing Trading
Swing trading involves holding securities for up to a few days, trying to catch a quick swing in price. Due to the faster paced nature of this strategy, there’s a lot of potential for compounded gains or losses.
Swing Trading Summary
| Upfront Learning | High – Lots of study and lost money before you can achieve sustained success |
| Active Involvement | High – As swing trading holds positions for no more than a few days, you need to always keep a pulse on the market. If you’re doing this on top of your job, you need to be able to check the market constantly throughout the day. There also needs to be a lot of reflection on previous trades to learn from your actions. |
| Advantages | – Fast paced, exciting – Gains can compound quickly – Fast feedback – You know very quickly if a trade was successful or not. |
| Disadvantages | – High potential for lost money – Just as gains can compound, so can losses, leading to blowing up an account. – Hard work and high risk – This strategy will take a lot of study to figure out. This strategy also really depends on the volatility of the market. – May not be able to be done in tax-advantaged accounts – This may be considered an active income and likely will not fit the criteria for the registered programs |
| Resources | – How to Swing Trade – Brian Pezim – Swing Trading for Dummies – Omar Bassal |
Because of the potentially high volume of trades, swing trading gains or losses can compound quickly. This can be a very difficult and humbling strategy. Though if you are willing to take the time and losses to learn, this could be fruitful.
Growth Investing
Growth investing involves holding a small number of positions for weeks or months. This strategy aims to ride the gains as the stock goes on a run. Growth investing can provide a good balance of fast-paced enough that you need to keep engaged, but also not so all-encompasing that it takes all your time. One thing to note is that growth investing is very market dependant, meaning it’s much more challenging in a down market.
Growth Investing Summary
| Upfront Learning | Medium – Understanding when to get in and out is important before starting. Also there’s lots of research on the stocks you may purchase. |
| Active Involvement | Medium – When holding over a few weeks or months, you can get away with watching less closely. That said, you do need to put in work to keep your watchlist updated, and you need to be able to check the market a few times a day to catch breakouts. |
| Advantages | – Active involvement – Keeps you in tune with the market which can be fun – If done well, creates potential for beating the market – Moderately fast feedback – You know relatively quickly if a trade was successful or not. |
| Disadvantages | – Potential for lost money – Because you’re only holding a small number of positions, the fluctuations in each can have an outsized effect on your overall performance – Market Dependant – Growth investing relies on the market swings, meaning it’s not uncommon to sit on the sideline waiting for the market to re-adjust – May not be able to be done in tax-advantaged accounts – This may be considered an active income and likely will not fit the criteria for the registered programs |
| Resources | – How to Make Money in Stocks – William O’Neil – Investing for Growth – Terry Smith |
Growth investing can be a good balance of being active, but not spending too much time on investing. That said, because you are actively making the investment decisions, there’s a higher potential for gains and losses. This could be a good balance point if you want to be active, but not glued to the market.
Value Investing
Value investing involves finding companies that are considered “undervalued”, then holding them for years as they return to a more appropriate price, and further increase in value. This investment strategy has been made famous by the likes of Warren Buffet or Benjamin Graham, though due to the longer-term nature of the strategy, feedback is less available.
Value Investing Summary
| Upfront Learning | Medium/Low – Fundamental analysis is important to pick the right companies, but the difficulty of this strategy is much lower. |
| Active Involvement | Low – There is some work upfront when researching companies, but when you’re holding the positions for years, there’s no need to check it on a daily or weekly basis. |
| Advantages | – Low Effort – Set it and keep a loose watch over a few years – Invest in Big, Well Known Names – Typically this involves big blue chip stocks – Relatively Safe – Because you’re holding long-term, short-term fluctuations are less impactful |
| Disadvantages | – Very Little Feedback – When holding for years, you don’t know for a long time if it was a good trade or not. – Lots of Upfront Research – Finding the gem in the rough can be very difficult – Potential to Lag the Market – Because of the long-term nature, it’s possible to lag the market, and not know it until it’s been a few years. |
| Resources | – The Intelligent Investor – Benjamin Graham – The Warren Buffet Way – Robert G. Hagstrom |
Value investing can be fruitful and return large gains in the long term. That said, there’s a possibility of failing to match or beat the market, and not knowing until it’s too late. That said, this is a great low effort way to take control of your investments.
Fund Investing
Of the key investing strategies, fund investing is definitely the easiest. Fund investing involves purchasing investment funds (mutual funds, index funds, exchange trading funds), and holding them theoretically forever. The funds are managed the issuing organization (often banks or investment firms – think Vanguard). As such, they often have a fee associated with the management (anywhere from 0.1%-0.5% for index funds, and 1-2% for mutual funds).
Now for this strategy, I would heavily encourage you to focus on index funds. Mutual fund fees can eat into the gains, putting you behind the market averages.
Fund Investing Summary
| Upfront Learning | Low – All that needs to be done is research on the funds to select and your allocation between types of funds (e.g. bonds, international stocks, S&P 500, etc.) |
| Active Involvement | Extremely Low – Once you’ve purchased the funds, all that needs to be done is a rebalancing about once a year. |
| Advantages | – Very Low Effort – Once purchased, can set you up for life – Diversified – funds contain a collection of stocks, meaning you’re well diversified – Safe – Because you’re betting on the market, unless the market completely collapses, your money will grow |
| Disadvantages | – Boring – No excitement with this style of investment – Gains will only ever match the market – No possibility of beating the market |
| Resources | – The Bogleheads Guide to the Three-Fund Portfolio – Taylor Larimore – The Little Book of Common Sense Investing – John C. Bogle |
Though fund investing can be boring, it’s exceedingly easy. This can free up your attention to building wealth through other facets, leaving your investments to quietly grow. If you don’t want to think about your money, and would rather invest your time and energy into other things, this is a great option. This is my personal favourite as it allows me to invest into my career, this blog, or my health.
Conclusion – Key Investing Strategies
The stock market can be a great way to build wealth, and reach your financial goals. There are so many stock market investing strategies that can be successful. It’s important that you align your strategy to your goals, interests, and risk appetite. Hopefully this article has given you an idea of what may be right for you, and which of the key investing strategies to choose.
So now, I urge you to take action towards your financial goals. Take that next step, and start living the life you want.