There is always someone giving investment “advice” as they promote one stock or another. But, what proven stock market strategies can you follow profitably over time? In this article, we look at a general approach to reliably profitable investing and then at specifics. For most investors, the best approaches are the simple ones. These are folks who have money they want to put away for retirement, a rainy day, putting the kids through college, or starting their own business. These folks have neither the time nor the inclination to get overly involved in the details of stock market investing but they do have money that they need to invest. And, then there are those who wish to become truly active investors in hopes of gaining a better return by picking and choosing individual stocks, timing the market, and engaging in shorter term investing and trading.
Proven Stock Market Strategies for the Passive Investor
You have a good job, a successful business, or perhaps you came into a large inheritance. Thus you have money to invest. You have heard that over the years the U.S. stock market has been the best place to put money for the long term. But you do not believe that you can learn enough to “beat the market.” So, you would rather take a safer approach. For most investors the most effective and proven stock market strategies are to put their money into highly diversified index funds such as those that track the S&P 500, use dollar cost averaging, and when owning dividend stocks, always reinvest dividends.
Passive Stock Market Strategy with Index Funds
The use of index funds for passive investing has become more and more common in recent years to the point when nearly half of the money invested in the U.S. stock market is in funds that track the S&P 500, its subsets, or other stock indexes. At some level, passive investment can be risky but not so much as trying to pick individual stocks when you do not have the skills or time to devote to the task.
Dollar Cost Averaging
This is a strategy for when you invest and how much you invest but not a strategy for what investments to buy. However, dollar cost averaging is most effectively applied to conservative long term investment portfolios of value investments. As we note in our article about how to invest in stocks, an investor sets aside a certain amount of money to invest with each paycheck or every month. They start this approach early in their investing career and continue for years and years. Because they invest a set amount of money they buy fewer shares of stock when prices are high and more shares of stock when prices are low. This approach is useful for two reasons. First of all, an investor does not pay too much in a bull market but takes advantage of low prices in bear markets. And, they invest all of the time so that their money is always working for them over the years.
Dividend Reinvestment is a Proven Stock Market Strategy
When a company grows to a certain point its rapid growth phase is over. It makes lots of money and needs to find a way to reward its investors and keep its stock price up. One way is to pay dividends. As a stock appreciates in value over the years and decades its dividend at a set percent of its stock price appreciates as well. The dividends paid today by Coca Cola, Microsoft, and others are multiples of their share prices back around 1990. And, when an investor uses dividend reinvestment plans with these companies the dividends are not paid out but are reinvested even in fractional shares and without any fees or commissions.
Proven Stock Market Strategies for Active Investors
And, then there are individuals who like active stock investing, have areas of expertise which give them advantages in picking investments, and are willing to devote the time and energy required to do the job right. There are really just two basic approaches for these folks. One is to attempt to time the market in order to catch a stock just before it rises or falls in value. Then the investor buys or shorts the stock, waits until its market value changes, and then cashes out with a profit. The other approach follows the time-honored approach of Benjamin Graham, the father of “value investing.” In this case, the investor looks for strong intrinsic stock value in a stock that the market is ignoring and underpricing. He or she purchases this stock and then moves it to the “passive” corner of the portfolio where it simply appreciates and creates riches over the years.
Five Proven Stock Market Strategies
Each of these five approaches to active investing and trading can be very profitable when executed properly. However, they require time, expertise, energy, and an appetite for risk. These approaches include the following:
- General trading based on anticipating the ups and downs of the market
- Selective trading of individual stocks over a few months to a year
- Buying low and selling high
- Finding and buying strong growth stocks
- Scouting out stocks at bargain prices
Although the time frames for these proven stock market strategies are different, they all work on the same basic principle. The investor evaluates stocks based on how the market is likely to treat them and on the fundamentals that eventually set the stock price. Investors hope to make money when they find a stock that the market has valued incorrectly either in the short term or in regard to its long term value.
The “tools” that investors use may vary but all are versions of fundamental analysis. This kind of approach goes back to Benjamin Graham who was an investor during the heyday of the 1920s stock market and for decades thereafter. His intrinsic value approach is based on projected future earnings. Other methods include comparing P/E ratio (price to earnings ratio) of a stock to other similar investment opportunities, following a “moving average” of the stock price, as looking at “margin of safety “ issues such as depressed stock prices of companies with huge cash reserves, not debt, and lots of property. The “game” is always to look for market inefficiency and buy or sell the stock before the market adjusts. Very short term traders use technical analysis tools to predict short term market and stock trends and trade accordingly.
Consistency Is Essential for All Successful Stock Market Strategies
As we said, any and all of the approaches we mentioned can be very successful. But the success depends upon sticking with the approach, adjusting tactics as necessary, and not jumping around to different approaches every time the market fluctuates. For beginning investors, a good “exercise” is to go to Investing.com and look at the last 50 years or so of the S&P 500 index.
In February of 1970 the index was 89.50 and today it is 2861! However, over the years there have been significant peaks and valleys in the S&P 500 as recessions took hold and market crashes and corrections occurred. Despite the ups and downs of the market, long term investors have seen their stock investments appreciate on the average 10% a year. Investors and traders who were able to correctly “time” the market or individual stocks can do even better if they are willing to do the work, take the time, and accept the risk.