What is an investment style? No two investors are exactly alike. Each approaches investing with different emotions, resources and goals. Figuring out and understanding your investment style before you begin investing can avoid costly detours down the road and help ensure your success. Simply answering a few basic questions will help you get started on the right track.
* What is your risk tolerance?
* How much money do you have for investing?
* How much time can you devote to managing your investments?
* How much money do you need and when will you need it?
* How will you divide your assets and where will you put them?
How much risk are you willing to tolerate? You can’t change the basic relationship between risk and reward, but you can and should choose your investment strategy based on your comfort level. Most investors can tolerate a moderate amount of risk in exchange for decent returns on their investments. Other, more conservative investors, concerned with safety, shudder at the thought of losing any money at all. Then there are the aggressive investors, living on the edge, always going for the home run and the big returns. Determining and staying within your comfort level is the biggest hurdle. Once you know your risk tolerance, the rest is straightforward.
How much money do you have for investing? That’s an easy one. You either have the money or you don’t. Your financial resources will dictate your options and the type of investments available to you.
How much time can you devote to managing your investments? Are you hands on, spending hours researching and tracking your investments, or content to trust others to do your research and send you quarterly statements? Most people fall somewhere in between those extremes.
How much money do you need and when will you need it? Here’s where you set your goals and tailor the investment to your needs. It makes little sense to invest for the long term when you’ll need the money in a year or two. Retirement may be 10, 20 or more years off and is a truly long term investment. You need to adjust your style based on your time horizons.
How will you divide your assets and where will you put them? For larger profits, you might invest in growth stocks, companies whose earning are expected to rise faster than the stock market. It can be risky looking for the next Microsoft or Wal-Mart, but the potential payoffs are huge. You hope for the long haul but you must be prepared to bail out if things go south.
Value based investing is like buying on sale. Here, you invest in companies or sectors that are temporarily out of favor, betting that the stock will rise to reflect true value. Not as risky as growth investing and again, this is a long term investment requiring patience.
Investing with income in mind is a more conservative, less risky approach. It will serve you well over both short and long term. Money market funds or government issued bonds are good examples. The returns will be lower, but much safer and more liquid.
If you’re like most investors, you’ll probably adopt a blended approach, diversifying your investments depending on your goals and stage of life. The younger investor who has more time can afford to ride out market swings, but when you near retirement, it’s time to bias your holdings toward wealth preservation.
A basic understanding of your investment style will get you started on the right track and give you the confidence to modify that style to meet changing goals and market conditions and help ensure a fruitful investing career.