Investment Strategies and Mediums

After understanding the various investment types associated with successful wealth-building, one has to understand how to invest in these various assets and through what medium to invest in them. An incorrect strategy will result in the loss of a significant portion of one’s potential gains – this is completely avoidable through careful planning. The strategies covered in this section will include the buy-and-hold, dollar-cost averaging, and lump-sum investing.

The buy-and-hold strategy consists of an investor purchasing an asset in the stock market and holding it for a long period of time (over 10 years). This strategy, according to Dr. Samuel Enow, equity analyst, is the most reliable way to invest due to it being a “valuable tool…to devise trading strategies as it represents a time-tested approach to investing that focuses on patience, discipline, and a long-term perspective.” As buy-and-hold is a time-tested strategy, it is a good start for beginner investors. Furthermore, investing with a long-term perspective allows investors to “benefit from long-term capital gains tax rates, which are typically lower than short-term capital gains rates” (Enow). Avoiding short-term capital gains taxes may not seem important, but in some cases, long-term capital gains taxes are over 10 percent less than short-term taxes depending on the investor’s income. 

Some investors may be skeptical of the performance of the stock market due to the short term volatility often seen from a day-to-day basis or even recent bear markets, like 2022. These short-term fluctuations do not affect investors using the buy-and-hold strategy. The S&P 500 index fund, closely scrutinized as a market indicator of performance, has had an average “return of 9.90% for the last 30 years” (Lake). Investing just 10,000 dollars into the S&P 500 in 1990 would leave one with over 322,000 dollars today. This would have been completely passive and would not have required any effort from the investor. Overall, investing in the market with a long-term perspective while utilizing the buy-and-hold strategy is a plausible, recommended way to invest.

Despite the merits of the buy-and-hold strategy, the term itself is generally not nuanced enough for valid advice on its own. Beginner investors often do not have the money to invest a large amount and allow for long-term growth, like in the last example. Despite this, there is a way to utilize the buy-and-hold strategy practically. Before explaining this, one must understand the difference between lump-sum investing and dollar-cost averaging. Lump-sum investing is the investment of a fixed amount of money at an initial point in time – this is the classic buy-and-hold strategy. Dollar-cost averaging, however, consists of an investor spreading their investments on a periodic basis – this generally ranges from weekly to monthly investments. As it is recommended beginners allocate a certain percentage of their income to investing every month, this website will primarily recommend the use of dollar-cost averaging. 

Now that the strategy one should use when investing is established, it is crucial to establish a medium through which to invest. Investing in a Roth IRA over a traditional IRA is beneficial to most investors in a lower tax bracket due to the lack of required minimum distributions (RMDs) and withdrawal fees. RMDs are the amount of money that is required to be withdrawn from an account after an individual reaches a certain age, while withdrawal fees are the fees that an individual incurs when they withdraw funds from an account. According to Lucas Goodman and Ben S. Meiselman, members of the U.S. department of the Treasury, Roth IRAs tend to be favored over traditional IRAs “...because the value of traditional accounts is more uncertain due to uncertainty in retirement-age marginal tax rates.” Since taxes are higher in a traditional IRA, it is more beneficial for a low-income long-term investor to utilize a Roth IRA. The RMDs present in a traditional IRA require that “you must begin taking [distributions] from a traditional IRA…after you turn 73…you must take them even if you don’t need the money for living expenses…you must almost always pay income taxes on those withdrawals” (Folger). Being required to start withdrawing money from one’s IRA disrupts the buy-and-hold process, and forces the investor to pay large fees.

Individuals that do not qualify for a Roth IRA should turn to a traditional IRA for investing; it is the next best option. Regardless of income level, however, all individuals have an IRA contribution limit.​​ This limit is shared across all IRA accounts; therefore, a low-income individual cannot turn to a traditional IRA after reaching their limit through a Roth IRA – the limit is applicable to IRAs in general. It is recommended that all individuals fully contribute to their IRAs each year before turning to taxable brokerage accounts.