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There are many types of investors out there.
But which are you?
Understanding your investment style is an essential step towards achieving your financial goals, so let’s get to it!
The first thing we’ll look at is the difference between active and passive investing.
Active investing involves regularly researching companies or markets, making frequent trades and investments, and attempting to outperform the market.
Active investors use tools such as financial news, reports, charts, and expert’s opinion to make informed decisions about when to buy and sell different assets.
On the other hand, passive investing involves buying and holding on to investments for extended periods, with the goal of tracking the market’s overall performance.
Since some active investors fail to outperform the efficient financial market, passive investors prefer to invest in low-cost index funds or ETFs, that track broad market indices such as the S&P 500.
Historically, this index has generated a high average long-term return of around 11%, including dividends, making it an attractive option for many investors who want to let their money work for them.
Regardless of whether you choose to be an active or passive, it is essential to understand the type of investment strategy in which you are investing.
Now let’s explore other investor types.
There are various types of investors, such as value investors, growth investors, income investors, momentum investors, and index investors.
Each type of investor has their own unique approach to finding and evaluating investment opportunities, and the type of investor you are, will depend on your investment goals, risk tolerance, and financial situation.
Value investors typically invest in companies that are currently undervalued by the market, but have strong fundamentals, such as a strong brand, a solid balance sheet, or a history of consistent earnings.
For example, companies such as Coca-Cola or Mastercard, which are well established and have a proven track record, are often attractive to value investors.
These investors believe that the market will eventually recognise the true value of these companies, resulting in a higher stock price and a profitable return on their investment.
Growth investors tend to focus on companies that are in their fast growth stages.
Examples of companies in which growth investors might be interested include Nvidia and Adobe, which are both known for their innovation and potential for future growth.
Income investors prioritise generating reliable passive income and may choose to invest in stocks that pay high dividends, or fixed-income investments such as US government T-Bills which offer a steady recurring income.
Momentum investors are characterised by their use of technical analysis and day trading strategies to identify trends, and their willingness to invest in any instrument type, regardless of its value.
These investors rely heavily on graphs and trends to make, buy or sell decisions, and are often focused on short-term gains rather than long-term growth.
Index investors, on the other hand, prefer a more simplified approach and invest in a general index such as the S&P 500, the Nasdaq or a specific sector.
Now, it’s time to talk about risk.
Risk tolerance is an important factor to consider when investing, and conservative, moderate, and aggressive are terms used to describe different levels of risk and potential return.
Let’s dive into each one of them.
Conservative investors prioritise capital preservation and focus on low-risk investments with high diversification.
Moderate investors seek a balance between risk and return, and are willing to take on some risk to potentially earn higher returns without losing a significant portion of their investment.
They tend to have a more diversified portfolio, including some fixed income, equity, currency or commodity investments.
Aggressive investors take on higher levels of risk for the potential of higher returns and may focus on growth stocks, commodities, or cryptoassets.
They may also choose to be less diversified and implement leverage to take advantage of volatility and maximise potential returns.
Now that you know what types of investors are out there, Which investor do you think you might be?
Active? Or Passive?
Do you want to try to outperform the market… or perhaps you’d rather take a long-term stake on a leading index?
What are your investment goals and risk tolerance?
This will define whether you are a conservative, moderate or an aggressive investor.
And what strategy, or strategies, appeal to you the most: value, growth, income, momentum or index?
As soon as you know your strategy and approach, you can get started building your portfolio.
Well, that’s it from me. We’ll see you in the next video!