What is your investment style?
For instance, are you a risk-taker or someone who is more risk-averse? Do you like short-term or long-term gains? Perhaps you want to depend on an advisor rather than taking independent decisions.
All of these are different investment styles that play a huge role in achieving your investment goals.
You can shape and design your portfolio, ideate and strategize your investments and compound your wealth depending on the styles of investing you adopt.
Let’s look at the different investing styles and see which one fits best with your personality.
1. Active Investing
If you like to keep a close eye on market trends or are motivated to take more risks to generate high returns, then your personality is best aligned with an active investing style. Such investors trade daily to capitalize on small market movements.
There is a lot of technical analysis involved in the decision-making process for active investors. The primary goal is to beat the market and maximize performance. The upside of this style of investing include:
The upside of this style of investing includes:
- An opportunity to outperform the index
- Scope to limit downsides
- Research-based buy and sell decisions
But it is not without a flipside either.
- Potential to underperform the index
- It may be less tax-efficient
- High fees may apply
2. Passive Investing
Investors who like being in the game to reap long-term gains are typically suited to a more passive investing style. The goal for such investors is not to beat the market but develop an avenue of sustainable income streams that consistently generate returns over some time.
If you are averse to risk-taking and are happy to ride out market movements, then the passive investment style is what you should go for.
The upsides include:
- High chances of performing close to the index
- More tax-efficient
- Lower fees may apply
Cons of passive investing are:
- Potential to outperform the index is unlikely
- Participate in all index downsides
- Index-based buy and sell decisions
3. Value Investing
If your investing style surrounds finding hidden gems in the market, you are into value investing. Your type involves looking at undervalued companies in the market and buying them at a fair price. In other words, you will invest basis the intrinsic value of the shares.
The idea is to hold onto these undervalued shares to reap the long-term gains. Generally, when the market undergoes a correction, the price of these shares will appreciate. Selling them will deliver sizeable gains to the investor.
Value investing comes with these advantages:
- Steady income from dividends
- Potential for stable returns
- Long term growth
The disadvantages include:
- Risk of falling into value traps
- The concept of intrinsic value is subjective to future earnings, cash flows, and interest rates
- Requires tremendous analysis and is a time-consuming process
4. Growth Investing
Growth investing may be your style if you are slightly more aggressive. Investors with this approach believe in the company’s future growth potential. It involves picking companies with high earnings growth rates, high return on equity, high-profit margins and low dividend yields.
Generally, growth-style investing will involve holding on to the stock for a couple of years in the hope that the stock’s intrinsic value will rise. Investors do not get dividends from such companies as profits are reinvested into the firm.
Benefits of growth investing include:
- Potential to gain high returns
- Long-term dominance with blue-chip companies
- Possibility to transcend the market trends
The downside of growth investing is:
- It comes with a higher investment risk
- May not generate any income
- Can end up in a bubble where prices fall rapidly
5. Momentum Investing
The momentum investing style is about buying and selling assets based on the strength of the current market trends. It is best suited for investors interested in short-term gains only by capturing a portion of the trend’s price movement. The goal here is to ‘buy high and sell even more heightened.
It happens when a specific asset gains value and catches prospective investors’ attention. They purchase the assets at a reasonably high value, which drives up the price even further as many sellers enter the market. With enough sellers in the market, the asset price gets corrected and eventually falls.
Pros of momentum investing includes:
- The potential for high profits in the short term
- Leveraging market volatility to your advantage
- Banking on the emotional decisions of other investors
Cons of this style of investing are:
- High stock turnover can be expensive
- Monitoring market movements can be time consuming
- Works best in a bull market
How to Choose an Investment Style?
You must understand a little more about investing when choosing your investment style.
It includes:
- Figuring out your timeline for investing
- Knowing your objectives and goals
- Understanding your appetite for risk tolerance
It also depends on how hands-on you want to be about managing your investment portfolio. For example, if you are more of a ‘buy and forget it’ kind of investor, then active or momentum investing may not suit your personality. On the other hand, if you like long-term value or are price-conscious, value or growth investing styles will be more aligned with your overall needs.
The Bottom Line
There is no right or wrong style when it comes to investing. Instead, you must understand your core traits and investment goals and combine them with your capacity to tolerate risk, which will help narrow down the investment styles that suit you best.
Would you like to create a portfolio suited to your risk profile and financial goals? If yes, subscribe to the 5 in 5 Wealth Creation Strategy to start.
Read more: How Long-term investing helps create life-changing wealth – TOI.