When it comes to your money, you want to make sure that you are making the right decisions. This is why it is important to understand the different types of investment styles out there. Each type of investment styles has its own set of pros and cons, so you need to find the one that is right for you.
In this article, we will discuss the different types of investment styles and help you decide which one is right for you!
What are investment styles?
Investment styles are simply the way that you choose to invest your money, and the strategy you use. There are multiple styles, each with its own unique strategy. Some may match an investor's personality better while others require a higher level of skill. Just like how there are different styles of clothing, there is no "one size fits all" when it comes to investment styles.
11 Types of investment styles
The most common types of investment each have a different goal, risk level, and return potential. Depending on your personal skills, temperament, and preference, you may prefer one style to another. This is because each of the different investment styles has a different set of characteristics.
Here are more details about the most common investment styles:
- Buy and Hold Investing
- Growth Investing
- Value Investing
- Deep Value Investing
- Momentum
- Small-cap Investing
- Dividend Income
- Dividend Growth
- Passive
- Long/Short
- Contrarian
Buy and Hold Investing
The buy and hold strategy is when you purchase an investment and hold onto it for a long period of time, regardless of the ups and downs of the market.
The thinking behind this strategy is that over time, the market will trend upwards, so holding your investment will allow you to profit from this trend.
This style is best suited for investors who are patient and have a long-term outlook.
Growth Investing
Growth investing is when you invest in companies that are expected to experience high levels of growth. This style is best suited for aggressive investors who are comfortable with higher risks and can stomach volatile markets.
Because these companies are expected to grow at a rapid pace, they often have higher valuations and may be more expensive than other investments.
Value Investing
Value investing is when you invest in companies that are undervalued by the market. This style is preferred by investors who are looking for bargains and are comfortable with holding onto their investments for a longer period of time.
These companies may be experiencing temporary setbacks, but they are often able to rebound and provide investors with profits.
Deep Value Investing
This is similar to value investing but differs in that you are looking for companies that the market has deeply undervalued. This could be due to several reasons such as a change in management, recent bad publicity, or even just general market conditions.
What deep value investing offers is the potential for much higher returns than simply buying cheap stocks. Of course, this also comes with a higher level of risk as these stocks could continue to fall in price.
However, for those willing to take on this risk, deep-value investing can be a very profitable strategy. To find deep-value stocks, you will need to look for companies that are trading at a significant discount to their intrinsic value. This can be difficult to do but there are a few ways to measure intrinsic value.
Momentum
Momentum investing is when you invest in companies that are experiencing a strong upswing in their stock price. This style works well for investors who are comfortable with higher risks and can stomach volatile markets.
Because these companies are experiencing rapid growth, they often have higher valuations and may be more expensive than other investments. However, momentum investing offers the potential for high returns if you can identify companies that are experiencing a sustained upswing in their stock price.
The best way to discover momentum stocks is to look for companies that have been increasing in price at a rapid pace. You can measure this by looking at the stock's 52-week price chart. If the stock has been consistently increasing in price, it may be a good candidate for momentum investing.
Small-cap Investing
Small-cap investing is when you invest in small companies with a market capitalization of less than $500 million. This style is preferred by investors who are looking for high growth potential and are comfortable with higher risks.
These companies may be more volatile than large-cap companies, but they also offer the potential for higher returns. To find small-cap stocks, you can look at the stock market's major indexes such as the Russell 2000 or the S&P SmallCap 600.
These indexes consist of small-cap stocks that have been screened for liquidity and financial stability.
Dividend Income
Dividend investing is when you invest in companies that pay out regular dividends. This style is preferred by investors who are looking for income and are comfortable with holding onto their investments for a longer period of time.
Dividend stocks tend to be more stable than other types of stocks with not much growth. However, the passive income from dividends can be very helpful, especially in retirement. To find dividend stocks, you can look for companies that have a history of paying out dividends.
You can also screen for stocks using dividend yield as a criterion. A high dividend yield indicates that the company is paying out a large portion of its earnings as dividends.
Dividend Growth
Similar to dividend investing, dividend growth investing is when you invest in companies that pay out regular dividends. However, with this style, you are also looking for companies that have a history of increasing their dividends.
This is important because it indicates that the company is not only committed to paying out dividends but is also growing its earnings at a faster rate. To find dividend growth stocks, you can look for companies that have a history of both paying and increasing their dividends.
You can screen for stocks using dividend yield and dividend growth rate as criteria. A high yield and high growth rate indicate that the company is a good candidate for dividend growth investing.
Passive
If you are someone that does not want to actively manage your investments, then you may be better suited for a passive investing style. This style is preferred by investors who are looking for a hands-off approach and are comfortable with holding onto their investments for a longer period of time. Because one of its main advantages is that it does not require constant monitoring of stock prices, or actively researching stocks.
Passive investing usually involves investing in index funds or exchange-traded funds (ETFs) that track a specific market index. With this type of investment, you will not have to worry about picking individual stocks but you will still be exposed to the ups and downs of the stock market.
The best way to get started with passive investing is to look into index funds or ETFs that track major market indexes such as the S&P 500 or the Dow Jones Industrial Average. Passive investors may also use a Robo-advisor or automate a DCA (dollar-cost averaging) strategy.
Long/Short
This investing style involves taking both long and short positions in the market. With long/short investing, you will need to constantly monitor the market so that you can take advantage of both rising and falling prices.
Investors that are willing to take a more active role in their investments tend to favor this style. A long position would be an investment that benefits from a rise in price, while a short position would be an investment that benefits from a fall in price.
To take a long or short position, you'll need to use a broker that offers margin accounts. This type of account allows you to borrow money from the broker to invest. You can also use derivatives such as futures, options, and swaps to take a long/short position. However, these instruments are more complex and carry a higher risk than buying stocks outright.
Contrarian
The word “contrarian” is often used to describe someone who takes an opposing view, especially if they do so in an irritable or belligerent way. But there’s more to being a contrarian than simply disagreeing for the sake of it; in fact, contrarianism can be a valuable tool for investing.
Contrarians tend to think differently from the majority; they’re independent thinkers who are not afraid to swim against the current. This allows them to see things from a different perspective and challenge conventional thinking.
One of the most important traits of a successful investor is the ability to think independently and make decisions that are not influenced by the herd mentality. Contrarians are often able to do this, as they are not afraid to go against the crowd. This can help them to spot opportunities that others may miss.
Of course, being a contrarian is not without its risks. It can be difficult to stick to your convictions when everyone around you is doing the opposite. But if you can stay disciplined, then contrarianism can be a valuable tool for generating returns.
Adapting your investment style
Each one of these investment styles can be adapted, depending on how you want to manage your portfolio or the type of stocks you will be looking for.
Active vs passive portfolio management
If you are not interested in developing your own investment style, you can also delegate this task to a portfolio manager. The two types of portfolio management are active management and passive management. Let's take a look at the differences, benefits, and disadvantages of the two options.
Active Portfolio Management
With active portfolio management, you will have a team of professionals working to actively manage your investments. This type of management generally requires a higher level of involvement and comes with higher fees, but also has its advantages.
The goal of active management is to outperform the market by picking stocks that are undervalued and selling them when they reach their true value. To do this, portfolio managers must constantly monitor the markets and make adjustments to the portfolio as needed.
Passive Portfolio Management
Passive portfolio management is a hands-off approach to investing. With this type of management, you will delegate the task of investing to a team of professionals but they will not actively manage your investments.
The goal of passive management is to match the performance of the market. This is generally accomplished by investing in index funds or ETFs that track major market benchmarks. While passive management is a less expensive and less time-consuming option, it comes with the risk of underperforming the market if it experiences strong growth.
Which one is right for you?
Both active and passive portfolio management have their pros and cons, so it's important to decide which type is right for you based on your goals, investment style, and level of involvement. If you are looking to generate short-term profits, then active investing may be the best style for you.
This involves buying and selling investments frequently in an attempt to make money from the market's movements. Active investing is best suited for investors who are comfortable with more risk and have the time to manage their investments.
Passive investing, on the other hand, is a more hands-off approach. With passive investing, you will typically hold investments for a longer period of time and won't make as many trades. This style is best suited for investors who are looking to generate long-term returns and are comfortable with less risk.
No matter which style you choose, it's important to remember that all investing comes with some level of risk. You should never invest more money than you are willing to lose.
Large caps vs small caps
Another important decision when it comes to investing is whether to focus on large-cap stocks or small-cap stocks. Large-cap stocks are those that are issued by companies with a market capitalization of $500 million or more. Small-cap stocks, on the other hand, are issued by companies with a market capitalization of less than $2 billion.
You will have to determine if you want to invest in only small-caps, a mix of small, medium, and large-caps, or solely large-caps. This will also determine the type of investment profile you will have, such as:
- Aggressive
- Moderate
- Conservative
Aggressive
If you are searching for aggressive returns, small-cap stocks tend to be more volatile than large-cap stocks. This means that they can generate higher returns but also come with a higher level of risk. Small-cap stocks are best suited for investors who are comfortable with more risk and have a longer time horizon.
Moderate
If you are looking for moderate returns, you can have both large-cap and small-cap stocks in your portfolio. This mix can provide you with the growth potential of small-cap stocks while also offering the stability of large-cap stocks.
Conservative
If you are searching for conservative returns, large-cap stocks are typically less volatile than small-cap stocks. This means that they come with a lower level of risk but also have the potential to generate lower returns. Large-cap stocks are best suited for investors who are looking for stability and are comfortable with less risk.
Bottom line
The market cap in relation to your investing style matters because it will give you an idea of how volatile your investments may be. If you are a growth investor, you may be willing to accept more volatility in your portfolio in exchange for the potential for higher returns.
If you are a dividend investor, you would want to stay away from small-cap stocks because they typically don't pay dividends. Value investors may find opportunities in mid-cap stocks that are trading at a discount.
Contrarians may benefit from investing in small-cap stocks that are out of favor with the market. No matter what your investment style is, there is a market cap that is suitable for you.
What is the best investment style?
There are many different investing styles that you can choose from. The style that you choose should align with your goals, risk tolerance, and time horizon. For example, a common strategy would be to use a buy-and-hold strategy for a few decades, then switch to a dividend (income) portfolio.
This strategy is good for long-term growth and gives you the ability to generate income in retirement. If you are someone that wants an earlier retirement, you can try adding some growth stocks in there. If you are someone that wants to make money in a shorter period regardless of the market conditions, a long/short strategy may be best for you.
If you are the type of person that is always looking for the next big thing, a momentum strategy may be right up your alley. And finally, if you are looking for an investment that is a bargain, you may want to consider a value investing strategy. The best investment style is the one that fits your needs the most.
Think about your risk tolerance and your investment profile based on your age, goals, and investable assets. Also, make sure to consider your time horizon. If you are close to retirement, a more conservative portfolio may be best. If you have a longer time horizon, you can afford to take on more risk.
Becoming self-aware is also essential for success in investing. Pay attention to your emotions and how you react to market conditions. This will give you a good idea of what styles work best for you and which ones you should avoid.
The important thing to remember is that there is no such thing as the perfect investment style for everyone. The best way to find out what style suits you the best is by doing some research and experimenting with different strategies.
