What kind of investor am I?
There are many different types of investor and investing approaches, and many investors may fit more than one category. Whether you take an active or passive approach, seek income, growth or value, it’s important to know what kind of investor you are.
How would you define your investment approach? The type of investor you are often depends on the final outcome you are hoping to achieve, as well as your attitude to risk and the premium you are prepared to pay for assets you like. But it can also be defined by the way you handle your investments day to day. For example, whether you actively manage your own money or you prefer to take a hands—off approach.
Typically, people will invest to generate growth or income, but they can also opt for a combination of both. Income investors are often people in retirement who want their portfolio to pay them a regular ‘salary’ that they can live on, but you can also reinvest income to grow your portfolio. Income investors may hold assets like dividend-paying stocks, equity income or high dividend funds, property, or bonds. Retired income investors will probably look for fairly low risk assets that are less likely to see capital loss, protecting their income—generating potential.
A growth investor is more interested in capital gains than income. They look for companies that can grow earnings faster than others, for example, by reinvesting profits back into the business and focusing on research and development of new products. They may buy early stage companies they hope will be the next big thing in years to come, or they may buy already large, established companies they think can continue to grow.
A value investor cares most about the price paid for a stock. They look carefully at price-to-earnings (P/E) ratios and other company valuation metrics to try to grab good companies at knock—down prices compared with their intrinsic value. These are not just cheap companies, which are usually cheap for a reason. Sometimes they buy a company when it is undergoing a turnaround or change of management, or after a setback when the shares are cheap. The risk they take, of course, is that the stock will never bounce back.
Passive investors ride the market ups and downs in products that track the performance of particular indices, like exchange traded funds (ETFs) or index trackers. This is a cheap and easy way to invest, and makes sense when you just want exposure to the world’s largest markets that are well covered by investment analysts.
Active investors closely monitor their portfolios day to day, do their own careful research into the things they buy and sell, and are always looking for new ideas and reassessing the investment case for their holdings. When an active investor gets it right, they boost their chances of limiting losses in falling markets and ramping up returns in rising markets. However, they can also be a little too active and end up trying to time the market with short—term bets. Many investors will pay professionals to be active on their behalf, but they need to be careful that those professionals are truly generating the performance that the high fees demand.
Speculative investments are usually pretty high risk. The investor’s focus will not be on the underlying value of a particular company, for example, but will be more interested in profiting from short—term price moves in the stock. Rather than thinking about holding the stock long—term, taking dividends or anything else, the investor will want to buy low now and sell high in the future, even the fairly immediate future, if the stock is a volatile one.
An impact investor wants their money to make a positive change in the world, so they will look to invest in socially responsible companies and projects. They might buy ethical or green funds, shares in companies working towards tackling climate change, or those striving for better standards in their supply chain or their treatment of workers. Or they might simply avoid those companies working in sectors that are environmentally damaging like oil or mining, or ethically questionable, like weapons manufacturers or tobacco companies.
Even if you run your own portfolio, rather than outsourcing it to a professional, you can still technically be quite hands—off. For example, say you set an automated payment to go into your pre-selected robo—advice portfolio each month. The robo—adviser would allocate that money and may rebalance it regularly for you depending on the service you use. You don’t have to lift a finger to manage your own investments. This might be an appealing prospect if you want to know you have a balanced portfolio of investments for the long term, but don’t have the time or inclination to monitor and rebalance them yourself. A financial adviser or wealth manager could also do this for you if you want a more active approach, but this will come at a higher cost which could dent your returns significantly over time.