Do you understand your investment style? If you’re like many traders, you might not have given it much thought. However, having a basic grasp of the main investment styles can quickly help you make sense of the myriads of investment options available today.
Investment styles can be categorized into three main dimensions: active vs. passive management, growth vs. value investing, and small-cap vs. large-cap companies. Evaluating each dimension will provide you with a clearer picture of which investment styles align with your preferences.
Your investment style can align with your future goals, such as planning for retirement. Check out our excellent blog on: Retirement Hyperinflation: Developing an Investment Thesis
Active vs. Passive Management
First, consider whether you believe that financial experts can consistently achieve returns above the norm.
Those who prefer having professional managers select their investments might lean towards active management. Actively managed funds employ teams of financial analysts and portfolio managers who aim to outperform the market. This expertise comes at a cost, making actively managed funds generally more expensive than passive ones.
On the other hand, some investors question the effectiveness of active managers in achieving superior returns. Research often shows that, over the long term, passive funds frequently deliver better returns compared to similar actively managed funds. Passive funds have lower expenses because they don’t require extensive research teams.
Growth vs. Value Investing
Next, determine if you prefer investing in rapidly expanding companies or undervalued industry leaders. Analysts use various financial metrics to classify companies into these categories.
Growth investing targets companies with high earnings growth rates, substantial return on equity, robust profit margins, and low dividend yields. The idea is that these companies are typically leaders in innovation, reinvesting their earnings to fuel future growth.
Value investing, however, focuses on acquiring strong companies at favorable prices. Investors seek companies with low price-to-earnings ratios, low price-to-sales ratios, and higher dividend yields. This approach emphasizes the importance of purchasing at a good price.
Small-Cap vs. Large-Cap Companies
Finally, consider whether you prefer investing in small or large companies. A company’s size is measured by its market capitalization, which is calculated by multiplying the number of outstanding shares by the share price.
Some investors believe that small-cap companies offer higher growth potential and agility, though this comes with increased risk. Smaller companies often have fewer resources and less diversified operations, leading to more volatile stock prices. Investors in small caps should be prepared for greater risk in exchange for the possibility of higher returns.
Conversely, risk-averse investors might prefer large-cap stocks. Companies like GE, Microsoft, and Exxon Mobil are established giants with stable operations. While they may not grow as quickly as smaller firms, they offer lower risk and more stability, often resulting in modest but reliable returns.
Conclusion
At the end of the day, there’s no right or wrong trading style. But with thousands of stocks and assets in the market to choose from, how do you know which ones to trade? You may not believe this, but…you can ignore almost all of them. When it comes to stock and options trading, artificial intelligence can tell you the few assets that you really should be looking at. Plus, your whole search and strategy can take less than 15 minutes. If you want to learn more – this free live class will show you how.
