Below, we will look at a few points that you need to consider when putting together an investment style for yourself. Of course, an individual can utilize more than one investment style. Many successful investors use various styles, because just as you can spread risk by diversifying your portfolio, you can spread risk by diversifying when it comes to investment style. You might for instance have one investment portfolio where you are very active and willing to take high risks, and another one were you are mostly passive and also prefer low risk and long-term investments.
For stocks: Do you want index funds or do you want to “beat the market”?
An index fund is a mutual fund or exchange traded fund where the portfolio has been constructed to match or track a specific market index, such as the S&P 500, Russell 2000, MSCI EAFE, Barclays Capital Aggregate Bond Index, or DJ Wilshire 5000. It is usually a broad and well-known index that is chosen for an index fund, but exceptions do exist.
The index fund is regarded as a passive form of fund management, but it is common for index funds to actually outperform actively managed funds. Index funds often have low operating expenses, low portfolio turnover and broad market exposure. If you are looking for a low expense ratio, an index fund can be a good choice.
The opposite of an index fund is a fund (or an individual investment portfolio) that tries to “beat the market”, i.e. outperform the indices.
For stocks: Individual stocks or investing in mutual funds?
If you are interested in investing in stocks, you can either invest directly in stock and thus become a shareholder in one or several stock companies, or you can invest indirectly in stocks buy purchasing units of a mutual fund or exchange traded fund.
Value investing is an investment style where you are actively looking for assets (such as stocks) that are selling for less than what you think they are worth. Many different methods can be employed to find these “discount” assets and the hunt can be quite time consuming.
The term growth investing is typically used for a type of investment style where the investor purchases shares in well-established companies based in mature economies. These shares tend to come at a high price, but the investor believes that they will continue to rise in value as long as the economy keeps growing.
A specific type of growth investing is the momentum investing strategy, which is based on current price trends.
Growth + Income investing
If you adhere to this investment style, you want two things out of your investment: value growth over time + income generation while you own the asset. You may for instance invest in stock companies with an established history of paying out dividends to their owners.
With this investment style, you focus on staying in the market for a long time rather than trying to time the market buy buying assets and then selling them quickly again. The nature of buy-and-hold investing makes it a rather passive investment style, since you don’t have to pay much attention to daily trends and market changes. You are in it for the long haul. Buy-and-hold investing typically means low trading and administration costs. Portfolios set up for this investment style are sometimes referred to as lazy portfolios.
The opposite of buy-and-hold investing is absolute-market-timing investing.
The Core & Satellite investment portfolio
A Core & Satellite investment portfolio consists of a core and various satellites. The core makes up the largest portion of the portfolio, and will typically be something regarded as low-risk, e.g. a S&P 500 Index fund. The satellites are many small investments intended to diversify the portfolio. You can diversify in many different ways, e.g. high-risk / medium-risk / low-risk, diversify geographically, diversify by sectors, diversify by asset types, and so on.
Hopefully, the satellites will help you outperform the market, without forcing you to create a high-risk portfolio.
Do you want to hire a financial advisor?
This is an important decision when it comes to investment style. Do you want to hire a financial advisor or do you want to be your own financial advisor? Maybe have a financial advisor for a part of your money, but also set up a private investment portfolio that you manage without any hired advisor? How much time and effort would it take to be your own financial advisor and are you willing to devote that time and effort? Some investment styles require more active work than others.