The best investment strategies for novice traders

  • 2023-05-03

One of the dominant trends in the financial services sector over the last number of years has been the rise of retail traders.

The emergence of online trading platforms has introduced a new generation of investors to the stock market. And thanks to popular online trading apps, the casual investor looking to secure their financial future is no longer forced to rely on more traditional – and cost prohibitive – options like bank-run brokerage firms.

Thanks to the rise of these online platforms, the trading and investment space has, for the first time in its history, become truly democratized. Any individual looking to invest in their financial future can get started within a matter of minutes.

Although access to these services has been significantly increased, however, there is still a massive knowledge deficit for new traders who are just getting started.

When you are dipping your toes into the world of trading and investment for the first time, this knowledge gap can seem almost insurmountable. However, this doesn’t need to be the case. It is possible to simplify your initial forays into the world of online trading and investment with some time-tested strategies.

With that said, here are some popular investment strategies that are good options to try out on your first investment portfolio!

Stick to index funds

One tried and tested investment strategy that is popular with beginners and advanced investors alike is simply to stick to index funds.

Index funds are types of mutual or exchange traded funds that are designed to follow specific pre-set rules based on a specified basket of underlying investment. A popular example of an index fund is the S&P 500, which tracks the stocks listed in the Standard & Poor’s 500 Index.

Index funds are a good way of diversifying your portfolio in a way that tracks the stock market as a whole. They are particularly useful if you don’t know enough about individual stocks to make a sound investment call. In this way, index funds present a relatively low-risk way of dipping your toes into the stock market!

You can even try out sector specific index funds if you have an interest in a particular industry. This is a popular approach with individuals looking to stick to ESG investing, for example, which prioritizes companies with strong corporate social responsibility credentials.

Index plus some added extras

Another investment approach that builds on the index fund approach is to invest primarily in suitable index funds, and then add a few extra individual stocks to your portfolio.

In terms of what your portfolio might look like with this approach, it could consist of 80% invested into something like the S&P 500, with the remaining 20% spread across some well-chosen individual stocks that match your risk profile.

The benefit of this approach is that it allows you to reap the benefits of index funds investment while also allowing you to choose some individual stocks you believe will perform particularly well. This gives you the opportunity to gain some experience analyzing individual investments without opening yourself up to too much risk.

If you choose this approach, we would recommend starting out with a high percentage of index funds – possibly as high as 95% – and then using the remaining 5% to choose some solid stocks that perform well.

Dollar-cost averaging

The other approach that both newbie and experienced investors alike frequently use is what is known as dollar-cost averaging.

This is the strategy of slowly adding money into your investments at regular intervals, rather than in lump sums more irregularly. You usually choose the amount according to your budget.

The benefit of a dollar-cost averaging approach is that by regularly purchasing a particular stock or index fund, you spread out your buy-in points instead of waiting for the perfect price point to buy-in, which might never materialize.

This helps you to avoid trying to time the market, which is something newbie investors frequently get sucked into chasing! More often than not, you won’t have perfect timing in terms of when you buy and sell, so it is better to expose yourself to the capital market prices in smaller increments over time.

Over time, you will lower your risk exposure and will more than likely end up with a larger portfolio that has been accumulated over a longer period.