One of the most interesting aspects of investing is the fact that the process is often so personal to each individual investor. While one investor might see opportunity in the markets by viewing it from one perspective, there may be another investor who sees opportunity viewing the market from the complete opposite perspective. Similarly, some investors are comfortable with taking on high levels of risk, with hopes of turning that risk into significant profit. Meanwhile, other investors prefer to expose themselves to as little risk as possible in order to protect their investments — despite the fact that this might mean making less money in the short term. As such, there are many different strategies that an individual can utilize to achieve these differing outcomes. In fact, there are some relatively extreme methods that are commonly practiced on each end of the spectrum. Here are two examples that you will likely find interesting and useful:
In the most basic of terms, passive investing can be described as an investing strategy in which an investor aims to maximize returns over a long period of time by keeping his or her levels of buying and selling (trading) at a relatively low frequency. In general, doing so allows the investor to avoid the fees associated with trading. Additionally, cutting down on trading can also reduce the amount of performance “drag” that sometimes coincides with trading. In this context, drag refers to the potential loss of money that could come from trading mishaps — which are nearly bound to happen at some point. To achieve this, investors who take on a passive strategy have historically tried to design their portfolio in a well-diversified fashion that, at least in-part, replicates market performance. It is not uncommon for such a strategy to require a considerable amount of research. Fortunately for modern investors, though, with investment vehicles such as index funds and ETFs (exchange-traded funds), the process has been made much simpler because they can track market indicators, such as the SPDR S&P 500 ETF, while at the same time simply trading these funds like normal stocks. Overall, passive investing is not meant to be a “get rich quick” strategy. Instead, it aims to be a long process (sometimes slow) that allows an investor’s portfolio to build steadily over time with a reduced amount of risk.
In contrast to passive investing, arbitrage investing is an extremely active strategy. To elaborate, an arbitrage investing strategy is focused on buying and selling an asset instantly — or as quickly as possible — in order to profit from a difference in trading price. To do this, investors look for assets that are trading on multiple platforms and could potentially have inconsistencies in price so that they can capitalize on the opportunity. For instance, if a stock is trading on one exchange for $5.00 per share, but on another exchange for $5.02 per share, an investor using an arbitrage strategy would buy as many shares as possible for $5.00 then sell them immediately for $5.05 before the price is corrected. As such, making a large profit often requires high quantities of stocks being traded using this method. Additionally, this strategy has become more difficult as technologies continue to advance and computers are able to correct prices (or make trades) at an extremely fast pace. However, that is not to say that arbitrage investing is not still a great option to read up on and consider!
Ultimately, a large part of becoming a successful investor is understanding different strategies and when / how to use them. While these two examples are extremely different in practice, history has proven that they can both be effective if practiced properly. Now, it is up to you to further explore these options — in addition to the many others — so that you can discover the strategy that is right for you and your investing goals!