Choosing an investment style matters when deciding how to shape your portfolio. Your investment style means the strategies, methods and ideas that influence your decision-making. There are different ways to approach investing, depending on your risk tolerance and overall goals. Comparing some of the most popular ways to invest can help you find your ideal style for growing wealth. One popular way of figuring through investment styles is by working with a financial advisor. SmartAsset’s free advisor matching tool can match you with advisors who serve your area.
1. Active Investing
Active investors are motivated primarily by a desire to generate higher returns in the near term. Day trading is an example of active investing in action. Day traders buy and sell securities throughout the day in an attempt to capitalize on (often small) market movements.
An active investing style may rely on technical analysis for decision-making. Technical analysis is concerned with identifying and tracking market trends in order to make educated guesses about which way a stock’s price might move next.
The term active investing can also be applied to mutual fund investment styles, in which a fund manager regularly buys and sells underlying securities in order to maximize performance. The main goal with this type of strategy is to beat the market.
2. Passive Investing
Passive investing is the opposite of active investing. A passive investor typically focuses on the long-term. Rather than trying to beat the market, they typically look to match the market’s long-term returns. Passive investors may be looking for ways to create sustainable income or produce consistent returns over time.
Someone who favors this investment style isn’t buying and selling stocks or other securities hour by hour or even day by day. Instead, they may purchase a core group of securities and invest in them regularly over time.
Passively managed mutual funds and exchange-traded funds (ETFs) tend to have much lower turnover than actively managed funds. As a result, they trigger fewer capital gains tax events and can carry lower expense ratios.
3. Value Investing
A value investment style is all about finding the hidden gems in the market. Value investors seek out companies that are undervalued, purchase them and hold onto them with the expectation that they’ll appreciate in value over time. They can then sell those investments for a sizable gain. Warren Buffett is one of the best known such investors.
One thing to be aware of with value investing is the value trap. This is a company that appears to be undervalued by the market but in reality, is not. Value traps can be dangerous because they don’t appreciate in value over time and in a worst-case scenario, the stock’s price can decline.
4. Dividend Investing
Dividend investors are focused on generating dividends in their portfolios for income. A dividend represents a share of a company’s profits as paid out to shareholders. Companies that pay dividends tend to be older and more established versus up-and-coming companies that are still growing.
Investors who earn dividends but don’t necessarily need that income now may choose to reinvest it in additional shares. Some stocks offer dividend reinvestment plans that allow for automatic reinvestment. This can help you grow your position in a stock without having to invest additional cash out-of-pocket.
5. Growth Investing
Growth investors are interested in companies that have above-average growth potential. Investing in growth companies can be attractive because of the potential for significant gains over time. These companies typically don’t pay out dividends since all profits are reinvested in growth. But they can be lucrative investments if you’re able to buy in early and sell high later.
6. Market Cap Investing
Market capitalization is a way to measure a company’s value, based on the number of outstanding shares issued and the price per share. Investors who use market cap as the basis for their investment style may focus on small-cap, mid-cap or large-cap companies exclusively. Or they move beyond those boundaries and invest in micro-caps or penny stocks or look to mega-cap companies with substantial valuations.
This investment style can offer different levels of risk and reward, depending on which market cap an investor leans toward. Large-cap companies may be more suitable for collecting dividends, for example, while small-cap companies could provide opportunities for finding growth or value investments.
7. Index Investing
Index investing is a type of passive investment strategy. An index investor puts their money into investments that track the performance of a specific benchmark, such as the S&P 500 or the Russell 2000. Returns are based on gains or losses in the benchmark index.
An index investment style may appeal to someone who’s hoping to match the market’s performance, rather than trying to beat it. Investors who choose to index may be more insulated against stock market volatility over time.
8. Buy-and-Hold Investing
Buy-and-hold investing is what it sounds like – an investment style that revolves around buying and holding securities for the long term. Similar to index investing, this is typically seen as a subset of passive investing. Buy-and-hold investors are looking for investments that have the potential to grow in value over time.
A buy-and-hold investment strategy can be advantageous from a tax perspective. Holding investments for longer than one year before selling them for a capital gain can trigger the long-term capital gains tax rate, which is more favorable than the short-term rate.
9. ESG Investing
Environmental, social and governance investing is all about choosing investments based on sustainability, commitment to furthering social causes and good corporate governance. ESG investing, impact investing and socially responsible investing all share similar aims, though ESG is specifically defined by the application of environmental, social and governance principles when choosing investments.
10. Factor Investing
Factor investing uses different factors or characteristics to determine which stocks to invest in. These factors can include elements of other investment styles, such as value, growth and market capitalization. A factor investor can also look at momentum and market trends in order to choose their next investment. Momentum is a technical indicator that’s used to pinpoint directional stock pricing trends.
How to Choose an Investment Style
Choosing an investment style starts with understanding some basic things, including:
- Your personal timeline for investing
- What your investment goals and objectives are
- How much risk you’re comfortable taking (i.e. your risk tolerance)
- Your capacity for risk, or the amount of risk you need to take in order to achieve your investment goals
It’s also important to consider how hands-on you want to be with managing your portfolio. If you’re more of a set-it-and-forget-it type of investor, then active trading probably isn’t the best option. On the other hand, if you’re into studying market trends and you want to make the most of your online brokerage account then an active style could work well for you.
Bottom Line
There’s no right or wrong way to invest and understanding different styles is important for finding the one that’s right for you. Taking an online risk tolerance assessment or questionnaire is one way to figure out which investment style might suit you best. You can also talk to your financial advisor about different strategies that could help you reach your investment goals.
Investing Tips
- Consider talking to a financial advisor about your current investment style and how that might translate to meeting your long-term goals. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Regardless of which investment style you choose, it’s important to do some regular maintenance with your portfolio to make sure you’re on track with your goals. That includes rebalancing investments periodically, harvesting tax losses and reviewing the fees you’re paying to invest.
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