Type of Investment Styles
Knowing that there isn’t a cookie-cutter approach in investing, what is your preferred investing style?
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Deciding on your investing style or investment strategy can be tough as there isn’t a cookie-cutter approach in investing. But knowing the range of investment styles can help you decide on the various investment strategies that you wish to use in your investing journey. It is like having an instruction manual guiding you through your investment process, and such thinking can help you reflect as you match your needs to a certain investing style.
There are two combining points of views that we can determine an investing style, namely market capitalisation, and risk preference. You should first consider your risk tolerance, which can either be conservative, moderate, or aggressive. The style box below is a graphical representation to help illustrate the many choices one can make while investing.
Market Capitalisation / Risk-based approach
I have previously written on market capitalisation, and you can read more about it here.
It is important to note that the idea behind choosing an investing style is not solely based on market capitalisation alone, but a combination with your desired risk appetite as well. A conservative investor might choose to have a higher percentage of asset allocation in fixed income, while an aggressive investor may have their eyes fixed on small or micro cap companies, commodities, cryptocurrencies, and venture capital investments. It is important to note that you can change the type of investment styles as you go through different life stages.
Growth vs. Value
Growth stocks are companies considered to have the potential to outperform the market in the long run due to promising future prospects, while value stocks are companies with share prices that are currently being traded below their value or worth. While growth stocks tend to portray the possibility of higher return on equity and profit margins, they tend to have low or zero dividend yields. This is often because the company is still at the beginning stage of innovation or discovery, and thus will reinvest most of its earnings to fuel continued growth. Value stocks, on the other hand, generally show signs of currently being undervalued and usually have the characteristics of paying higher dividends. Investors adopting this method believes the stock price will increase in the future while receiving consistent returns over time.
All investors intend to look for the next Apple, Amazon, or Tesla shares and hope to accumulate wealth by allow compounding to do its work. Using these dimensions can help paint a clearer picture of your investing journey as you periodically assess the risk tolerance, investment goals, and time horizon.
