Core strategies

Introduction

Investors use many different methods to build portfolios and make decisions. Some strategies focus on how long investments are held, while others focus on the types of securities an investor chooses or the source of expected returns.

This section covers several widely used approaches: buy and hold, dollar-cost averaging, growth investing, dividend investing, income investing, index investing, and value investing.

These strategies are not always alternatives to one another. In fact, investors can combine several of them within the same long-term plan.

What is a core investing strategy?

A core investing strategy provides a repeatable way to approach investment decisions. It can guide how an investor puts money to work, chooses investments, and responds to market changes.

Some strategies are mainly about behavior. Buy and hold, for example, emphasizes staying invested for long periods. Dollar-cost averaging focuses on investing at regular intervals.

Other strategies focus more on investment selection. Growth and value investors use different ideas to evaluate companies, while income and dividend investors pay closer attention to cash distributions.

Core strategies at a glance

Strategies based on how you invest

These approaches can work together. For example, an investor might contribute the same amount to a portfolio every month and hold the investments for decades.

Strategies based on what you invest in

Growth and value investing focus on different characteristics when selecting securities. A growth investor generally looks for companies expected to expand revenue, earnings, or cash flow at an above-average rate.

A value investor, by comparison, looks for securities that appear inexpensive relative to an estimate of their underlying worth. The challenge is deciding whether a low valuation represents an opportunity or reflects genuine business problems.

Neither style consistently leads the market. Their relative performance can change as interest rates, economic conditions, valuations, and investor expectations change.

Strategies focused on income

Dividend investing focuses primarily on stocks of companies that return part of their profits to shareholders through dividends. Investors may examine dividend yield, growth, payout ratios, business quality, and the ability to maintain the payment.

Income investing is broader. It can include dividend stocks, bonds, REITs, and other investments that make cash distributions.

However, a high yield is not automatically attractive. In some cases, an unusually high yield reflects a falling price or an increased risk that future payments will decline.

Index investing

Index investing aims to follow the performance of a market index rather than select individual securities expected to outperform it. Investors commonly use index mutual funds and index ETFs for this purpose.

This approach can provide broad diversification at relatively low cost. It also reduces the need to continually research individual companies.

Still, index investing does not remove market risk. If the index falls sharply, a fund tracking that index will generally decline as well.

Active and passive elements

Investors often describe index investing as passive and growth or value stock selection as active. This distinction is useful, but real portfolios can contain elements of both.

For example, an investor might passively hold a broad stock-market index while actively deciding how much to allocate to stocks and bonds. Another investor might use an index fund as the core of a portfolio and select a smaller number of individual stocks around it.

Therefore, active and passive investing are not always all-or-nothing choices.

How to compare investing strategies

When comparing strategies, investors should look beyond recent returns. A strategy that performed well over the last year may simply have benefited from favorable market conditions.

Instead, consider the source of expected returns, the risks involved, costs, diversification, tax effects, and the amount of research or maintenance required. It is also important to ask whether the approach can be followed consistently during difficult markets.

Most strategies go through periods of underperformance. Switching approaches whenever leadership changes can lead investors to repeatedly buy what has already risen and abandon what has recently struggled.

Combining core strategies

Core strategies can complement one another. Dollar-cost averaging can describe how money enters a portfolio, index investing can determine what the investor buys, and buy and hold can describe how long the investment remains in the portfolio.

Similarly, an investor can own both growth and value stocks or combine income-producing investments with assets aimed at long-term capital growth.

The broader guide to investing strategies explains how goals, time horizon, risk, costs, and investor behavior can shape these decisions.

Key takeaways

• Core investing strategies provide repeatable frameworks for putting money to work and choosing investments.
• Buy and hold and dollar-cost averaging mainly describe how investors behave and invest over time.
• Growth and value investing use different approaches to selecting securities.
• Dividend and income investing emphasize cash distributions, while index investing focuses on broad market exposure.
• Several strategies can work together within the same portfolio.
• No strategy guarantees returns, and each approach can underperform for extended periods.