From a broad standpoint and view by stepping back and looking at the forest there are three broad investment strategies. The long investment, medium investment and short investment strategies.
Long Investment Strategies
The long investments strategies include investing in low cost index funds and ETF and these assets are used to build wealth slowly and it takes decades to build wealth with these asset, but the risk of loss is low. This is mainly applied by contributing to tax advantage accounts like a 401K, 403B, 457, TSP, IRA and HSA. This is the preferred method to build wealth because this is the lowest risk asset class and because you can use tax deferred income to build wealth whereby increasing the amount you can invest. You ideally should have the majority of your investment dollars in these assets, though that sometimes depends on how conservative you are and also your age, but in general it’s a no brainer when it comes to building wealth and these tax advantage accounts should be contributed to first and maxed out whenever possible. I love JL collins stock series because he discusses the pros, safety and cons of index fund investing and describes how the market always goes up, you just have to have patience.
Now just because the market always goes up doesn’t mean it never goes down in the form of dips in its relentless march upward, the last of which occurred in the market crash of 2008 when the S&P 500 fell 40%. All the stocks including index funds will fall forever until it reaches zero! That’s what was heard form all the asset managers, investment banker and news outlets. Stock brokers were lining up to jump from the building ledges because they truly believed this. Now to be fair multiple companies did go bankrupt and fall to zero, but not the index fund. Believe it or not, the best thing to do when this happens is to buy more shares of your index funds near the bottom and in the middle of a market crash because the market will always go up. Just don’t try to time the middle or bottom. Now this takes guts, but these are the actions taken by patient and wise investors. The S&P 500 have since regained all those losses and then some. This speaks volume to the safety of index fund investing if you have the stomach for it.
Medium Investment Strategies
The medium investment strategies include investing in assets such as real-estate and REITS and can build wealth moderately from day 1 and and it increases every year by building equity and if sold at market highs can lead to significant short term income. The buy and hold strategy is what produces significant long term passive income by having multiple rentals.
Real Estate Investment Trusts (REIT) are stocks that pay significant dividends and can be purchased in a taxable account or your tax advantage accounts. There are also multiple other ways to invest in real estate as mentioned in physician on fire’s post of his interview with Chad Carson.
Short Investment Strategies
Short investments vehicles include investing in individual stocks and more specifically strategies that employ market timing like day trading and options. It also includes Investing in commodities, junk bonds, hedge funds and cyrotpcurency.
There are other methods and strategies used to buy individual stocks like the buy and hold strategy. This method is still risky and can gain short, mid range and long term returns. This strategy is employed by buying stocks for a fair price and holding them for as long as the company is profitable or meet certain metrics. This strategy includes dividend stock investing, value stock investing and growth stock investing. When investing in these categories stocks are usually sold if the divided is cut below a threshold or the value or growth outlook falls below a given threshold.
As you can see as we move down the ladder from the long to short investment strategies the skill level and investing acumen increases greatly as does risk. In general I believe that 75 to 85% of your portfolio should be in the long term investment category, 10 to 20% in the medium term category and 5-10% in the short term category.
This is of course somewhat subjective depending on your risk tolerance and skill set. A young CPA or stock broker may have her portfolio with over 50% in the short term category and in generally the younger you are the more risk you can afford to take and the closer you are to retirement age the less risk should be taken.
On the contrary a young investor seeking early retirement may decide to invest aggressively in the medium investment strategies by building a real-estate empire to try and build up a high passive income stream and then use the passive income stream to fund his retirement accounts once it reaches a certain level. Now this will take at least a moderately paying job to fund this venture and of course there are less riskier options available, but to each his own.
Funny enough you can even build up wealth somewhat aggressively as well using the long investment strategies to build up wealth and reach early financial independence with the option to retire early. This strategy is laid out most plainly in Jim Collin’s book The Simple Path to Wealth where he discuses how he saves 50% of his income and bought index funds and placed the excess cash after maxing out his retirement accounts into his taxable account and lives of the dividends of his index fund portfolio. He calls it F you Money. Now this takes a lot of discipline, but it’s less risky than the other strategies. The compound interest of massive stock piles of cash used to buy index funds is the goal to this strategy. Hence starting early is the key.
The other benefits of having your portfolio divided between the three investment strategies includes diversification and the chance to develop multiple streams of passive income. The short and medium strategies can not only lead to aggressive accumulation of wealth, but it can lead to multiple streams of passive income that can lead to early retirement if that is your goal.
It also should be noted that almost all the investment strategies long, medium and short overlap. They all have features within them that can make it a short, medium or long term investment vehicle. ETF’s for example can be traded by employing market timing and can even be bought in a taxable account and can be bought and sold multiple times throughout the day. ETF’s can also be used when buying individual stocks using the buy and hold method to give your portfolio a tilt toward certain market sectors. For example the MJ ETF can give your portfolio exposure to the Cannabis industry without having to buy individual marijuana stocks which seems to be rising and falling like the sun.
Lastly investing in all of its form is risky. There is no zero risk investment. If someone tries to sell you one, run for the hills. The most you can do is risk stratify to your risk tolerance and investment goal. I also want to point out that just because an investment is more risky doesn’t mean that the returns will be greater.
I am not a licensed accountant or financial advisor or hold any type of professional financial certifications. This content is general information on investment strategy and does not constitute official or personalized investing advice. It is not a solicitation to buy or sell stocks or any security. Invest at your own risk. The views of this blog are my opinion alone unless stated otherwise. Any type of historical financial success does not guarantee future returns.