All successful investors have at least one thing in common: a solid investment strategy. 

Think of your investment strategy as a roadmap that guides you toward your preferred financial destinations. It outlines your approach and points you in the right direction during soaring or turbulent markets. 

But you shouldn’t pick just any roadmap — your strategy should fit your needs, wants, and lifestyle. 

5 basic investing principles every investor should know

Every investor starts somewhere. With these basic investment principles in mind, you’re already on your way to success. 

1.   Setting investment goals keeps you on track

Investing without a goal is like getting in your car without a destination in mind. Sure, you’ll go on an adventure — but it might not end where you’d hoped. Determining short- and long-term goals gives you an idea of:

  • How much you need to save
  • How long you need to save
  • Where to invest to meet your risk tolerance and profit goals

For instance, investing for retirement in 30 years looks very different from saving for a brand-new car to buy in five. Generally, longer-term investors can stomach more volatility, while shorter-term investors may prefer safer assets. 

2.   Investing is not a “get rich quick” scheme

Financial markets are notorious for short-term ups and downs — i.e., volatility — that make investors feel queasy. But if you’re investing over the long term, these dips are just part of the wealth-building process. After all, volatility goes in both directions, and riding the waves up is how you overcome normal investment losses. 

Ideally, you’ll stay invested for years or even decades to take advantage of asset appreciation and compound interest, where your profits grow profits.

3.   Your risk tolerance matters — a lot

Every investor has their own risk tolerance when it comes to losing money. Your risk tolerance “measures” how much risk you can stomach based on your:

  • Age
  • Investing timeline
  • Financial situation

Emotions also play a big role. For some investors, a rapidly changing market presents buying opportunities; for others, it sparks panic.   

Ultimately, all investments risk losing money, with high-reward assets carrying the most risk. If volatility makes you nervous, you may prefer to trade potential gains for lower-risk, lower-anxiety investments, instead.

4.   Portfolio diversification hedges against risk

Diversification involves spreading your investment dollars across different asset classes, industries, and regions. By investing in several assets, you hedge against the risk that one (or more) won’t perform. In other words, it makes sure you aren’t putting all your eggs in one basket — or even in one kind of basket.

Spreading the risk around also increases your portfolio’s resilience during market downturns. When one part of your portfolio sinks, the rest of your assets might see gains (or at least smaller losses).  

5.   Time in the market beats timing the market

New investors may be tempted to time the market by buying stocks at perceived lows and selling at perceived highs. But typically, keeping your money in the market long term generates larger profits by minimizing fees and capitalizing on compound interest. 

One famous example of this principle is the Warren Buffett bet. 

Back in 2008, Warren Buffet bet hedge fund managers that a passive, low-fee index fund would outperform actively traded hedge funds in the long run. Over ten years, Buffett’s theoretical $1 million investment generated $854,000 in profits. Meanwhile, five competing hedge funds “earned” just $220,000. 

Investing in the market doesn’t have to be difficult — exchange-traded funds (ETFs) and mutual funds make diversification quick and easy. 

7 common investment strategies

Your investment strategy guides your decision-making process. Each strategy focuses on a different aspect of investing, like generating growth, minimizing risk, or preserving capital. It’s also common to mix and match investment strategies to build an approach suited to your individual needs. 

1.   Dollar-cost averaging

Dollar-cost averaging (DCA) focuses on adding to your investments on a regular schedule. With DCA, you make regular contributions to your portfolio over time, regardless of how the market performs. (For instance, investing $75 per week or $300 per month — whatever fits your budget and goals.)

DCA helps investors shrug off the temptation to time the market. It also reduces the impact of market volatility by smoothing out your purchase price over time. 

Pros of dollar-cost averaging

  • Passive (with automated deposits)
  • Disciplined approach to investing
  • Requires minimal maintenance
  • Removes some of the emotional elements of investing

Cons of dollar-cost averaging

  • Risk of increasing your average purchase cost
  • Requires steady cash inflows
  • Does not guarantee profits or protect against losses

2.   Passive investing

Passive investing involves buying and holding assets for years or decades. Passive investors generally believe that holding assets over the long term yields greater profits than short-term trading. 

Many investors use passive methods like index investing to minimize costs and increase diversification. (Index investing involves buying funds that passively track market indexes like the S&P 500 or Nasdaq Composite.)

Other investors may do their own research initially, then “set and forget” their portfolios.  

Pros of passive investing

  • Lower lifetime trading costs 
  • Easy to diversify with index funds
  • Pairs well with DCA investing
  • Typically outperform active trading strategies

Cons of passive investing

  • Takes time to build wealth
  • Important to avoid panic-selling in rough markets
  • You won’t outperform the market

3.   Active investing

Active investing is the opposite of passive investing. Under this strategy, investors (or fund managers) make frequent trades in an attempt to “beat” the market. 

Active investing typically requires some level of advanced technical and/or fundamental analysis. Investors may also pair this strategy with day trading or momentum investing strategies that follow current market trends.  

Pros of active investing

  • Making the “right” trades can produce large returns
  • Plenty of funds to choose from if you don’t want to do your own research

Cons of active investing

  • May generate higher short-term capital gains taxes
  • Trading fees and commissions eat into gains
  • Typically rely on complex analysis

4.   Value investing

Value investing — the preferred strategy of Warren Buffett — involves investing in assets you believe are undervalued. After buying in, you may hold assets for years or decades until they reach their “true” value. 

Value investing is based on the idea that irrational markets present opportunities to buy stocks at discounted prices. Some investors select their own assets, while others invest in value-based ETFs and mutual funds.  

Best for:  Long-term, buy-and-hold investors willing to build wealth over time

Pros of value investing

  • Long-term opportunities for gains
  • Supported by financial analysis
  • Value investments are more likely to pay dividends

Cons of value investing

  • Undervalued assets may remain undervalued or decline further
  • Requires thorough research and analysis
  • Investments may take time to realize their value

5.   Growth investing

Growth investing involves buying assets that you believe have the potential to explode in value. Unlike value investing, growth investing is a shorter-term strategy that considers a company’s current health and near-term potential. 

Many growth companies offer unique, in-demand products or services that competitors can’t easily provide. Recently, this space has been dominated by tech start-ups, green energy-related businesses, and emerging/developing markets. 

Best for: Investors looking for the next big trend who don’t care about earning dividends 

Pros of growth investing

  • Potential for substantial capital appreciation
  • Capitalizes on emerging trends and companies with strong growth prospects
  • Easy to start with growth-focused funds

Cons of growth investing

  • Growth stocks typically don’t pay dividends
  • Increased risk and volatility
  • No guarantee of success
  • Some growth stocks may be long-term holds

6.   Socially responsible investing

Socially responsible investing (SRI) aims to pair investor values with positive, long-term asset performance. That is, SRI puts your dollars where your values and moral compass lie.  

You can tailor SRI assets toward issues that matter to you, such as avoiding “sin stocks” (alcohol, gambling, etc.), promoting environmentalism, or community outreach. You can also add SRI-focused funds to a larger portfolio for added diversification.  

Best for: Investors who want  their investments to make a positive impact in the world

Pros of socially responsible investing

  • Invest with your values
  • Reward ethical companies
  • Diversify an existing portfolio

Cons of socially responsible investing

  • SRI-only portfolios might see limited gains
  • Mixed research on whether SRI funds over- or under-perform standard indexes
  • The definition of SRI is subjective
  • Companies may violate their own SRI commitments

7.   ESG investing

ESG investing stands for “environmental, social, and governance” investing. It’s similar to SRI, except where SRI investments exclude industries, ESG funds include industries. 

ESG investors look to companies that incorporate one or more ESG principles into their business practices. (Such as using green energy or paying employees well.) Some research suggests that ESG investments are more sustainable and profitable in the long term. They may also be less likely to violate local laws, which leads to fewer fines and bad press.   

Best for: Investors who want to align investments with sustainability goals 

Pros of ESG investing

  • Mix and match values and support positive change
  • ESG investments may perform better over the long term
  • Some research shows ESG funds are less risky

Cons of ESG investing

  • ESG ratings are subjective
  • Focusing solely on ESG factors may exclude outperforming companies
  • Some ESG funds charge higher expense ratios