WHAT TYPE OF
INVESTOR ARE YOU?

Your investing style is the strategy you follow when making investment decisions. Examples include active investing, which involves hands-on decision-making and frequent trading, and passive investing, which focuses more on long-term investment in diversified funds like index funds or ETFs. 

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Before diving into the financial markets, it’s crucial to know yourself as an investor. 

Just as we all have unique personalities, our investing styles reflect our individual preferences, goals, and attitudes toward risk. Knowing what type of investor you are will help you make smarter investment decisions aligned with your financial goals. 

Whether you’re a conservative investor seeking stability or an adventurous one chasing growth opportunities, understanding these styles is key to achieving your financial objectives. 

There are many different types of investors. Which one are you? 

In this lesson, we’ll look at two of the most common investing strategies — active and passive investing — and delve into other popular investing styles, like value investing, growth investing, income investing, index investing, and momentum investing. 

By the end, you’ll have a better idea of what your investing style is — and how to apply it to your portfolio.

Understanding investing styles

Investing styles are the different approaches investors take when making investment decisions. They reflect an investor’s preferences, risk tolerance, and financial goals.

Understanding your investing style allows you to align your investment choices with your needs, reducing the risk of making impulsive or poor investment decisions.

Knowing what type of investor you are also helps you develop a more consistent and disciplined approach to investing. It helps you stay focused on your long-term objectives, avoiding the temptation to chase short-term market trends or engage in excessive trading. 

Your investing style serves as a guide, helping you filter through the thousands of investment options and strategies available. 

Ultimately, knowing your investing style empowers you to make informed decisions that align with your financial goals and risk tolerance, increasing the likelihood of achieving long-term investment success.

The most important quality for an investor is temperament, not intellect.

Warren Buffett

Active vs. passive investors

Investing can be divided into two main categories: active and passive. Understanding the difference between the two is crucial for new investors when managing their portfolios. 

Active investors, as the name suggests, are more hands-on and actively make decisions about buying and selling securities in an attempt to outperform the market. They conduct extensive research and monitor market trends to identify investment opportunities. 

Active investors believe that by actively managing their portfolios, they can generate higher returns than the overall market.

Keep in mind that this approach requires a significant amount of time, effort, and expertise, as well as the ability to make accurate predictions about future market movements.

Passive investors take a more laid-back approach. They aim to match the performance of a specific market index or benchmark rather than trying to beat it. 

One way for passive investors to achieve this is by investing in index funds or exchange-traded funds (ETFs), which are designed to mirror the holdings and returns of a specific index. Instead of trying to time the market or pick individual stocks, passive investors focus on diversification and long-term investing. 

This approach tends to have lower costs and requires less active management, making it a popular choice for investors who prefer a more hands-off approach or those who believe that it is difficult to consistently beat the market through active investing.

Other investing styles to consider

Investing offers a wide range of approaches for both active and passive investors. But not all approaches suit every investor, so it’s important to grasp the differences before choosing a specific style.

There are several other investing styles investors use to achieve their financial goals. 

Value investing

Value investors seek out stocks that they believe are trading at a price lower than their intrinsic value. These investors dig deep into financial statements and analyze various fundamental factors like earnings, book value, and cash flow. 

Their aim is to buy stocks at a bargain and hold them for the long term, waiting for the market to recognize their true worth. Value investors typically take a patient approach, focusing on the fundamentals rather than short-term market trends.

Growth investing 

Growth investors look for companies with high potential for future growth. They seek out businesses with strong potential for expansion, often in innovative industries or with disruptive technologies. 

They prioritize companies that demonstrate consistent revenue growth and high profitability — ones that reinvest earnings for further growth. The goal is to capture the potential appreciation in the stock price over the long term, as these companies continue to grow.

Income investing 

Income investors prioritize fixed-income assets like bonds, dividend-paying stocks, or real estate investment trusts (REITs). The primary objective is to receive regular cash flow in the form of interest payments or dividends. 

By focusing on income-generating assets, income investors aim to supplement their current income or build a reliable source of cash flow. 

Index investing

Index investing involves buying a diversified portfolio of securities that mirror a specific market index, such as the S&P 500 . 

Instead of trying to outperform the market, index investors aim to match its performance. By investing in an index fund or an exchange-traded fund (ETF), which tracks the index, investors gain exposure to a wide range of stocks or other assets within the index. 

This approach offers simplicity, diversification, and typically lower fees compared to actively managed funds, making it an attractive option for those seeking long-term, low-cost investment growth.

Momentum investing

Momentum investing capitalizes on the idea that stocks that have performed well in the past will continue to perform well in the future. 

Investors using this approach identify stocks that have shown upward price trends and strong market momentum. They aim to ride the wave of positive price movements, buying stocks that are gaining momentum and selling those that are losing steam. 

The philosophy behind momentum investing is that market trends persist in the short term, presenting opportunities for profitable trades. This style requires closely monitoring market trends and reacting quickly.

Remember that these investing styles are not mutually exclusive, and many investors combine elements from different styles to create their own personalized approach. It’s crucial to choose a style that aligns with your financial goals and risk tolerance.

Risk tolerance and investing 

Risk tolerance is an individual’s willingness and ability to handle potential losses in pursuit of investment returns. Understanding your risk tolerance helps you determine the right investment style that aligns with your comfort level.

Investing involves some risks, and different people have different thresholds for accepting that risk. 

Some investors are more risk-averse and prefer conservative investments with lower potential returns but also lower volatility. Others may have a higher risk tolerance and are willing to take on more volatility in pursuit of higher potential gains.

Assessing your risk tolerance involves considering factors such as your financial goals and time horizon. It’s important to strike a balance between risk and reward that suits your individual comfort level and financial objectives.

Here’s a look at some of the different investing types based on risk tolerance. 

Conservative investing

Conservative investing prioritizes capital preservation and stability over high-risk, high-reward opportunities. 

These investors tend to focus on low-risk assets such as government bonds, blue-chip stocks, and fixed-income securities. They aim for steady, reliable returns rather than chasing significant growth. 

This approach is well-suited for those with a low risk tolerance or a shorter investment time horizon, seeking to protect their capital and generate consistent income.

Moderate investors

Moderate investing style strikes a balance between risk and reward. It combines elements of both growth and value investing, aiming for steady returns while managing potential volatility. 

Moderate investors typically seek a mix of stable, established companies with growth potential, as well as dividend-paying stocks or bonds for income generation. 

This approach is a middle ground that suits those looking for a balanced approach to investing, seeking solid returns without taking on too much risk. This can often be achieved by building a portfolio of different asset classes, such as bonds, currencies, commodities, and stocks.

Aggressive investors

An aggressive investing style involves taking on higher levels of risk in pursuit of potentially higher returns. These investors are willing to embrace volatility and allocate much of their portfolio to high-risk assets such as growth stocks, commodities, and cryptoassets.

This approach requires a strong tolerance for risk and a long-term perspective, as aggressive investments can experience significant fluctuations in value. 

Aggressive investors aim to capitalize on market opportunities and are willing to accept the ups and downs that come with the pursuit of potentially higher rewards.

Final thoughts

Before diving into investing, it’s important to set clear investment goals, assess your risk tolerance, and determine the time you can dedicate to managing your portfolio. Follow these golden rules to align your strategy with your comfort level.

Next, identify and trade investments that align with your unique investing type and risk tolerance.

Visit the eToro Academy to learn how to build a portfolio that suits your style.

FAQs

Can my investing style change over time?

Yes, investing styles can change as individuals’ financial circumstances, goals, and risk tolerance evolve. It’s important to regularly review your investing style to ensure it aligns with your current needs and objectives.

How do I determine my risk tolerance and investing style?

Determining your risk tolerance and investing style involves assessing your financial goals, investment knowledge, time horizon, and comfort with risk.

It can be helpful to work with a financial advisor who can guide you through the process and help you identify an appropriate investing style.

Which investing style is the best?

There is no “best” investing style as each style has its own advantages and considerations. The best investing style for you depends on your individual financial goals, risk tolerance, and investment preferences.

Can I combine different investing styles in my portfolio?

Yes, it is possible to combine different investing styles in your portfolio. By diversifying across different investing styles, you can potentially benefit from the strengths of each style and reduce the overall risk of your portfolio.

How often should I reassess my investing style?

It’s a good practice to reassess your investing style periodically, especially when there are significant changes in your financial situation, goals, or risk tolerance.

Reassessing your investing style annually or when significant life events occur can help ensure that your investments remain aligned with your evolving needs.

Should I adjust my investment strategy during market downturns?

Reacting emotionally to short-term market fluctuations can lead to poor investment decisions. Instead, focus on your long-term goals and stay committed to your investment strategy. Periodic reviews and adjustments can be made, but they should be based on careful analysis.

What assets should a passive and conservative investor buy?

Passive and conservative investors prioritize capital preservation by purchasing low-risk assets and diversifying their capital across different positions. Exchange-traded funds (ETFs) are a solid option as they offer built-in diversification and liquidity.

This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments.

This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.

eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.