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One investing strategy does not fit everyone! In this section we will take a look at several simple ways you can invest for retirement
Dollar Cost Averaging into Index Funds/Mutual Funds/ETFs/Stocks
Dollar Cost Averaging using Fundamentals
Fundamental Investing into Winners
Vocabulary
Compounded Annual Growth Rate (CAGR) measures the mean annual growth rate of an investment over a specified period, assuming steady compounding.
Annual Return typically refers to the simple average annual return (AAR), calculated by averaging periodic returns without accounting for compounding effects.
Downside Deviation quantifies the volatility of negative returns below a target threshold (Minimal Acceptable Rate), focusing only on harmful risk.
Sortino Ratio evaluates risk-adjusted returns by dividing excess return over a minimum acceptable rate by downside deviation alone.
Minimal Acceptable Rate (MAR or MARR) is the lowest return threshold an investor requires for a project to justify its risks and opportunity costs. For our calculations we will be using the 1-Year T-Bill (often considered risk free rate since it is a government backed bond).
Cash Return on Capital Invested (CROCI) measures a company's efficiency in generating cash profits from its total invested capital.
Dollar Cost Averaging into Index Funds/Mutual Funds/ETFs/Stocks
Dollar Cost Averaging into Index Funds/Mutual Funds/ETFs/Stocks
If you can't beat them, join them. Dollar-cost averaging (DCA) involves investing fixed amounts regularly into indexes like the S&P 500 or Nasdaq, regardless of price, to lower average costs over time by buying more shares when prices dip. A majority of investors uses a DCA approach towards their investing for the simplicity.
Index Benefits
These indexes provide consistent long-term growth through automatic rebalancing
Underperformers get removed, while emerging leaders are added, enhancing safety and reducing volatility compared to individual stocks.
S&P 500 spans 11 sectors for broad diversification
Nasdaq-100 tracks top 100 non-financial stocks to emphasize high-growth innovators, excluding banks for purer tech/innovation focus.
Performance Metrics
S&P 500 CAGR since 1957 inception is about 10.3%; past 10 years (2015-2025) around 13.2%.
Nasdaq-100 CAGR since 1985 inception ~15.5%; past 10 years ~18.1%.
Popular ETFs like SCHG (Schwab U.S. Large-Cap Growth ETF), tech-heavy growth fund, shows ~15.8% CAGR since 2009 inception and ~17.5% past 10 years, outperforming broad market via leaders like tech giants.
How to DCA into SCHG Using $500/Month
Dollar-cost averaging (DCA) into SCHG (Schwab U.S. Large-Cap Growth ETF, expense ratio 0.04%) invests $500 monthly, buying more shares when prices dip for a lower average cost, leveraging its tech-heavy growth focus.
Follow these steps:
Open a brokerage account (e.g., Schwab) and buy SCHG shares automatically on the 1st each month.
Transfer $500 regularly, purchasing at market price—more shares on dips, fewer on peaks.
Hold long-term to benefit from compounding in growth leaders.
Example Table
Over 5 months with fluctuating SCHG prices (end price $28); "Price Change" shows direction. Total Value and ROI now shown each month (using that month's end price for valuation).
Dollar Cost Averaging using Fundamentals
Dollar Cost Averaging using Fundamentals
In this situation, we may move towards holding a higher concentration, if not all of your positions, in individual stocks. Some of the basic metrics we use to determining the viability of a stock, reduction of risk, and returns on growth are the following calculations.
Annual Return % (Look at each year for the past 5 or 10 years. This shows the volatility and can give an idea if the returns are consistent annually or primarily outlier years.)
Compounded Average Growth Return % (Typically measured over the last 5 or 10 years to show consistent returns throughout that time period)
Downside Deviation
Sortino Ratio
Earnings Per Share / Earnings Per Share Growth
Revenue / Revenue Growth
The first 4 are the fundamentals that show us the return we can get based upon the risk we take on. The S&P500 is considered to be a low risk investment tool as the 500 companies across 11 sectors tends to smooth out drops in the market. In comparison, since the Nasdaq is heavily weighted in technology/growth and avoids financial companies, it will have a slightly higher risk profile versus the S&P500.
The last 2 factors show us the rate at which growth is stabilizing, increasing, or decreasing. While we would love to see these metrics continually moving upward, the ability to reach new highs and then stabilize at these new heights is just as important; otherwise what goes up quickly, will come down quickly.
In general, you could also take into account whether that company possesses a monopoly, think about Hawaiian Electric being the only company in Hawai'i, has a huge edge in the market, or entry into that market has huge barriers to entry (difficult for others to enter the market - e.g. high costs, regulations, competition).
I Have Identified My Winners, Now What?
Once you have your winners selected, similar to DCAing into the S&P500, you will now DCA into the stocks you selected. For some, they believe in selecting 4-5 stocks at most due to limited funds and to focus on the best. In other cases, some believe in mimicking indexes and selecting upwards of 20-40 stocks. In my opinion, this is better suited for larger portfolios to avoid thinning out your additions into multiple positions. Here are some ideas on selecting your stock basket.
Avoid high correlation with stocks you select; do not pick two semiconductors or two oil companies
Look for stocks from different sectors: technology, finance, healthcare, consumer staples/defense, energy, or consumer discretionary
Look for markets that could see even larger growth due to things changing in the world. For example, semiconductors are used in every electronic and the demand is extremely high due to the rise in AI, cloud storage, and quantum computing.
Find 1-2 stocks that are in areas that will steadily grow with lower volatility despite global or national events: Covid, recessions, war, inflation (Consumer Staples/Defense)
Allocate a Percentage
We have narrowed the field down to 4-5 stocks, maybe more if you are so convicted, now it is time to allocate your money to each stock that you have selected. Will you evenly distribute any new money to your investments or would you like to allocate more to particular sectors? This is an individual decision and should be taking into consideration the fundamentals we started with to make your decision. Here are some thoughts to consider.
Even across the board. If they are showcasing excellent CAGR over the last 5-10 years, keep it simple.
Weight your selections based on volatility. If you want more growth potential, weigh your technology sector heavier for growth. If you are more conservative, put more weight into less volatile sectors.
Conviction. Weight more into your conviction of a company and what you know about it.
There is more than one way to determine your weighting, but at the end of the day you need to be able to execute and live with your decision. You can always change the weights over time.
Fundamental Investing into Winners
Fundamental Investing into Winners
This is similar to the one above, but uses another calculation to help us make decisions, and has a few strict rules to follow.
CROCI, or Cash Return on Capital Invested, measures a company's efficiency in generating cash profits from its total invested capital, providing a clearer picture than traditional metrics like ROIC by focusing on actual cash flows rather than accounting earnings.
A good CROCI shows us that companies are continually investing their money wisely into the company and are benefiting from those investments.
We still use the other metrics in the previous concept, but now we are seeing if new investments are bringing even greater returns.
Rules to Follow for this Strategy
Start with no more than 5% of your portfolio in any single position.
Only add to winners, not losers; no DCA!
Hold winners for 3 years minimum
Start with no more than 5% of your portfolio in any single position
This is to start the base of your investing into quality companies. It also avoid having bias of you allocating more to one single stock and being hit hard if you are wrong.
Only add to winners, not losers; no DCA!
In this strategy, you will have to always be aware of your average cost per share. If you are ever below your average cost per share, based on current price, you will not add to your position when you add new money. The idea is that we want to add to winners that are continually growing and not add to losing positions. We want to grow our money, not add to our losses.
Moderna (MRNA)
Monthly chart on the left
Company saw exponential returns during the Covid, but price continued to fall since and has never recovered
If you continued to DCA into this position, your loses would have been catastrophic
What do you mean only add to winners?
Here are a few scenarios to help you understand when to buy.
Add to your Position
Above your average share price and in an uptrend
DO NOT ADD to Your Position
Though you are above your Average Share Price, current price action shows that we are in a downtrend.
Until we break out of a downtrend, we will not add to our position.
Add to Your Position
We are above our Average Cost Per Share
We are out of the downtrend
We are in an uptrend (two points to a line)
Be Patient
Add to position only when above Average Share Price.
If the Average Share Price was your opening position (5%), this minimizes your losses by not adding money to a loser.
When it rises above, we can begin adding to a winner
This focuses on only investing in winners that are growing, rather than money becoming stagnant or adding to our losses (money not moving, growing, or losing).
Hold winners for 3 years minimum
Hold winners for 3 years minimum
While we will still evaluate companies annually, if a company fundamentally changes, you are absolutely able to cut your losses and sell your position. Many people will consider selling near years end to capture tax harvesting to reduce your tax burden. But, if we selected good companies that have great returns, we are looking to hold for the long term. Here are a few things to consider.
Typically, good companies will have one bad year and two good years. We are hoping to capitalize on the two good years.
Sortino Ratio indicates how much risk we take on with our stocks in comparison to the downside risk and returns we receive, so by finding companies with less than 20% downside and a Sortino Ratio over 1, we are essentially selecting stocks we believe that will hold their value in comparison to other companies in hard times.
By holding positions, and not adding in bad times, we limit our losses instead of compounding.
Monthly Additions
Monthly Additions
Here are three stocks based on starting position/average share price. Which would you add to this month?
Based on this example, you would only allocate money to the first and third stocks shown above. The second stock is currently losing money and we do not add to losing positions or DCA.
Regardless of which long term investing strategy you deploy, they have all worked throughout longer periods of time with good stocks. The main thing is to focus on the company and whether or not their thesis has changed; which is why we do annual checks on fundamentals with the most recent year.
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