A Beginner’s Guide to Data-Driven Investing Strategies

Data analytics technology has become essential to modern finance and needs to be incorporated into your investing strategy.
big data in investing strategies
Shutterstock Photo License - By Freedomz

Big data has been an invaluable contribution to our daily lives. We have started relying on big data to research new products, improve our experience online and make a number of other improvements.

One of the biggest benefits of big data has been in the field of investing. Savvy investors have discovered the data analytics and AI technology can tremendously help when they want to reach or even set their goals.

Using Big Data to Create a Well Executed Investing Strategy

Are you considering investing in stocks and shares? You will find that big data technology will be incredibly useful. Here are some tips to help ensure your efforts are successful by using big data.

1. Build Your Savings & Emergency Fund by Using Data Analytics to Identify Needs

People with limited knowledge in terms of money management tend to find themselves eager to invest and earn profits in an instant. This could not be further from the truth and is actually a recipe for disaster. While there is nothing wrong with setting high investment goals, it is important to build your savings as well as emergency fund before anything else. Most investments have a risk involved and the last thing you want is to lose it without a backup fund.

Savings give you both short-term and long-term financial security. Of course, they do not have the potential to grow like investments but they come in handy during those rainy days. If you are looking to make a major purchase, be it planned or an emergency, savings are there to help.

An emergency fund, on the other hand, helps protect you financially during emergency situations that call for a lump sum of money. For example, an emergency fund will help cover your regular financial needs during the period you lose a job and are looking for another one.

This is a surprising area where data analytics can be very helpful. You can use data analytics tools to forecast future expenses and assess the probability of various costly events (such as your car breaking down based on its age and model), so you can create an emergency fund that addresses these risks.

2. Diversify through Mixed Investments by Using AI Allocation Strategies

With the many investment platforms and options out there, it can be overwhelming to know the best one for your needs and lifestyle, especially if you’re a beginner investor. If you are just dipping your toes in investment, then it’s best to choose only the best investment option available to you. By doing this, you’ll gradually learn the basics of investment and also assess both the rewards and risks associated with the opportunity.

If you have already dipped your toes and want to continue with the journey, then you’ll want to diversify your investment portfolio. By spreading your assets or investments across various channels and options, you will be substantially reducing the risk of losing all the money while maximizing the potential rewards. Always consider the value vs growth when deciding where to invest.

The best-diversified investment portfolio should have the following elements:

  • Short-term investments
  • Domestic stocks
  • International stocks
  • Bonds

You will find that AI technology can be very helpful when it comes to allocating your investments. Many services such as Vanguard use AI to help find the best investments and streamline allocation.

3. Master the Art of Gains & Risks with Data-Driven Risk Scoring

If you want to become successful in this domain, you need to have an investor’s mindset. Before diving into the investment world, you may have come across ads that claim you can make big earnings by only investing a small amount of money. In the world of investment, if something sounds too good to be true, then it probably is.

High risks make high returns and low risks give small gains. This is the general rule of thumb in investing. Risk is simply the potential for money loss while gains refer to the value increase of your investment. If someone encourages you to invest a small amount of money, which means lower returns, but they promise high returns in a short period of time, that should be a red flag.

When it comes to investing, you need to have an intuition for scammy deals.

Big data can be very helpful when it comes to assessing risks. You will be able to use data analytics tools to identify the risk of vairous investments under various conditions by looking at variables such as the beta coefficient and technical analysis patterns.

4. Use the Cost-Averaging Method

While going all out has the potential of giving more gains, this is not the best way to start an investment journey unless you can afford to lose all that money or are fond of taking risks. A great way to reduce financial risks on investment is to implement the dollar-cost-averaging method. This strategy allows you to send a consistent amount of money at certain intervals, rather than investing all your money in one go.

The dollar-cost-averaging strategy is great for people who are usually influenced by emotions when it comes to investing. With this strategy, you get to prevent these emotions from clouding your judgment. When the prices unexpectedly go down, you can be able to stay in the game rather than being forced to bail out. Also, you can advantage of the dip by buying more shares.

However, the cost-averaging strategy has its downsides, more noticeably the inability to differentiate good investments from bad ones. If the industry you pick takes a hit down the line, then you’re bound to gradually lose your investment. That’s why it is vital to conduct thorough research and learn investment options have the potential of solid returns down the road.

This is probably one of the biggest benefits of data analytics. You can use big data tools to do cost-averaging a lot more quickly.

5. Be Comfortable with Discomfort

Data analytics can be very helpful in the field of investing. However, you are going to have to accept that some level of risk will always be present. You need to be comfortable with some level of discomfort, even in an age where big data tools can facilitate investing.

Given you are putting your hard-earned money on the line, investing is one of the biggest emotional roller coasters in life. This is a fact that you should come to terms with before you even dip your toes in this field. Due to the volatility aspect of the markets, you should learn how to become comfortable with discomfort, as setting up an investment trust, is undoubtedly a journey full of risks.

In addition, it is vital to set realistic expectations in regard to your investments. It is less possible for conventional portfolios to give you substantial returns as stocks only give an average excess return when they are priced in average valuations, which the chances are even slimmer because of the stock markets.

Regardless of the investment opportunities, you settle on, you are bound to deal with discomfort. The secret is learning how to deal with it as at the end of the day, you will get to harvest your returns and not have to fret about retirement.

6. Stay Abreast with Changes in the Market

As earlier mentioned, every industry experiences ups and downs. While there are both pros and cons of investing, no one can precisely predict what will happen. In order to remain competitive on the safe side, you should stay abreast with emerging trends and new events, rather than waiting for your returns to grow. This helps you adapt accordingly.

Also, do not fall into the trap of market timing, which refers to trying to find the right time to invest.

Data Analytics is Vital to Modern Investing

Big data has become very important in the field of investing. You can’t afford to overlook the importance of using big data tools to make the most out of your investing strategy.

Sean Mallon
Sean is a freelance writer and big data expert. He loves to write on big data, analytics and predictive analytics.