Which Investing Style Is Right for You?
Updated · Oct 17, 2022
If you want to secure a bright financial future, you need to choose your investments carefully. But if you may find that sometimes experts give conflicting advice.
That’s because there’s no such thing as the perfect investment. The right strategy will depend on your specific goals and preferences.
To help you find your investing style, we give a detailed overview of the main approaches.
What Is an Investment Style?
Investors follow different approaches when building their portfolios. Many use a combination of several strategies for investing in stocks.
Each style depends on the owner’s risk tolerance, return goals, preferred timeline, and so on. Knowing your profile can help you make an informed decision regarding your finances.
If you’re working with an investment manager, they will perform a quick assessment to determine your style.
But worry not, as you can do that yourself.
Investment Strategy Types
Every investor has a unique approach, but we can classify them into a few groups. There are three main dimensions on which the styles differ from each other:
- Level of involvement
- Risk profile
- Growth vs. value orientation
- Type of companies preferred
Active vs. Passive Management
One of the main components that determine investment styles is the level of involvement.
Active investors assume a very hands-on approach.
They try to outperform the market by monitoring trends and fluctuations closely and trading stocks accordingly.
In contrast, the passive investing style is a hands-off, long-term strategy. Some securities suitable for that purpose include mutual funds and ETFs.
Another passive strategy is to copy the performance of an index like NASDAQ or S&P 500. This so-called indexing is an effective, low-maintenance way to create a diversified portfolio.
Next, you need to know what a risk tolerance level is in the context of investment.
In simple terms, it means that some people are willing to put their wealth at stake with the hope of high returns, while others prefer to play it safe.
If you can’t afford to take any losses, your investment style is probably conservative.
People using this strategy usually build fixed income or dividend growth portfolios.
Those may include bonds, money market funds, and dividend-paying securities.
A moderate investment requires some risk tolerance in exchange for slightly higher returns. Investments in this category include blue chip, dividend-paying, and value stocks.
Aggressive investments include emerging markets and growth, hedge, and capital opportunity funds, among others.
The aim is to outperform market benchmarks.
Growth vs. Value
Your style of investing can be oriented toward value or growth stocks.
Value stocks are shares of companies with a low price-to-earnings ratio and potential for a better return in the long term. These are undervalued stocks of strong firms with high dividend yields.
A growth investment strategy involves buying stocks of businesses with a high return on equity, profit, and earnings growth rate. That said, their price-to-earnings ratio is often high, meaning they may be overvalued.
Of course, it doesn’t have to be one or the other.
There is a hybrid approach called growth at a reasonable price, or GARP. This style combines the best of the two stock investment strategies.
You can craft a moderate portfolio of growth stocks at lower prices.
Market capitalization is a measure of business sizes and another factor affecting the styles of investing. You can find this metric by multiplying the number of outstanding shares by the stock price.
Small cap styles of investing come with higher risk and greater growth potential. While such companies have more room to develop, they often have a narrow focus and few resources.
In addition, the small cap doesn’t guarantee low share prices. This means investors may run the risk of bigger losses.
Large cap companies, on the other hand, are often established industry giants with a rich history of stable growth. Unlike growing businesses, they develop at a slow, steady pace.
As such, they offer smaller returns but also lower risk. This makes them a good long-term investment.
Every investing style is unique.
Still, we can classify most approaches based on a few dimensions:
- Risk tolerance
- Level of involvement
- Market cap
- Growth / value
Choose your investments based on where you stand on these dimensions, and you’ll have a diversified portfolio tailored to your needs.
With an eye for research, Aleksandra is determined to always get to the bottom of things. If there’s a glitch in the system, she’ll find it and make sure you know about it.