In trying to make their money work harder for them, investors often fall for questionable investment strategies that promise to help you get rich quick but usually deliver huge losses. But the smartest ways to reach your money goals don't require you to deal with arcane, hard-to-understand financial products. By following these three simple investment strategies, you can get the long-term results you want without the risk you'll find with more aggressive and dubious alternatives.
1. Dollar-cost averaging.
Few investors have huge pots of money to invest all at once, but most people are able to set aside at least a modest amount of money every month. Dollar-cost averaging involves taking that money and investing it in a mix of low-cost index mutual funds or ETFs. The exact mix depends on your tolerance for risk, your time horizon, and the amount you have to save, but by putting aside the same amount month in and month out, you'll build a habit of saving and investing.
The benefit of dollar-cost averaging is that when shares are cheaper, you'll buy more of them with the same fixed amount. Meanwhile, when prices rise, you end up with fewer shares, and so on average you'll buy more when an investment is cheap than when it's expensive. Buying low is a key tenet of investing, and dollar-cost averaging lets you take full advantage of it.
2. Using tax-favored accounts.
The biggest challenge in investing is making sure that you keep as much of your earnings as you can. Unfortunately, taxes can sap a huge portion of your investing profits, making it essential for your investment strategy to include ways of keeping the tax man at bay.
IRAs and employer-sponsored retirement plans like 401(k)s are a great tool for savers to use in implementing a smart strategy for investing. By putting stocks and other growth assets in an IRA or 401(k), you can shelter their income from tax as long as the money stays within the account. Some retirement accounts force you to pay tax on the amount you withdraw, but Roth IRAs actually let you take that income tax-free. Using tax-favored accounts to hold your investments isn't complicated, but it'll save you plenty at tax time.
3. Choosing dividend stocks for growth and income.
Investors struggle with finding the right balance between investments that will grow and investments that will provide solid income. But dividend stocks offer the best of both worlds, paying reliable dividend income but also retaining the growth potential of some of the most successful companies in the world.
Investing in dividend stocks is easy. Exchange-traded funds Vanguard Dividend Appreciation (NYSEMKT:VIG), iShares Dow Jones Select Dividend (NYSEMKT:DVY), and SPDR S&P Dividend (NYSEMKT:SDY) give you low-cost access to dozens or even hundreds of dividend-paying stocks, all within a single investment vehicle. If you prefer, you can also buy individual stocks, either through a broker or through direct investment plans. Blue-chip companies General Electric (NYSE:GE) and Procter & Gamble (NYSE:PG) are just two of the hundreds of stocks that offer shares through direct plans and allow you to reinvest dividends automatically in additional shares at no fee.
It's not hard
If these investment strategies seem simple, it's because they are simple. Whoever said that investing has to be complicated was dead wrong. These suggestions won't work as quickly as high-risk alternatives, but they will work in the long run, and the results you'll get will be worth the wait.
Fool contributor Dan Caplinger owns shares of Vanguard Dividend Appreciation and iShares Dow Jones Select Dividend. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Procter & Gamble, and owns shares of General Electric. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.