Investment is done for one goal only, to grow your money without undue risk. However, there is no single investment style that can be followed by everyone. Everyone has different requirements and temperament, so their investment style or philosophy will differ from one another. In the following sections we go over different types of investment styles, so that you can choose and find out which is the style that you can follow.
Active Investing vs. Passive Management
In active investing, the manager or owner of the investment funds is supposed to actively work to make sure that the investment is giving the best results possible. Active investing requires time and knowledge from you, so this is the right approach for you if can devote your time and knowledge to manage your portfolio yourself.
Compared to that, passive investing requires lesser interventions from the manager or owner of a portfolio. In passive investing, you can invest in bonds or stocks that can be expected to last for a longer time, and therefore do not require constant supervision from you. However, even a passive portfolio should be checked at least once a year to make sure that the bonds and stocks that comprise it are in good health.
Active and passive investing comes into play not only in personal investing, but also when you choose the type of mutual funds to buy. In terms of mutual funds, passive investing can be done by investing in Exchange Traded Funds that track a broader benchmark such as S&P. Active mutual funds are ones in which the manger will routinely add or remove stocks according to their investment strategy.
Passive investment is the right approach for you if you do not have the time, knowledge or inclination to routinely work on your portfolio. In the case of mutual funds, a passively managed mutual fund is the right choice for you if you want stable growth that is not influenced by any possible mistakes from your fund manager.
Growth Investing vs. Value Investing
Growth investing refers to investing in companies that are expected to grow at a fast clip. A growth of more than 20% per year for a few years makes the company a growth opportunity. Investment in such companies is done by first checking that they can continue to grow for the next few years. For example, if you invest in a fast-growing food chain, you should make sure that there are states and cities where it can still expand to. If the chain is already present in every city, then there is not much scope for its growth. In short, growth investing is done in companies that are expected to claim a larger share of the market and are expected to grow as they do so. Growth investment is the right style for you if you are willing to rake the risk of investing in a company that may grow very fast, or one that also comes with the risk inherent in high growth rate.
Value investing is a style of investing that has been popularized by Benjamin Graham, who was a teacher of Warren Buffer at Columbia Business School. According to this style of investing, you are supposed to seek out companies which are undervalued when compared to their inherent value. Calculating inherent value of a company is almost half the job in this style, and is not an easy thing to do. However, once you understand how to do it, and have a method in place, you can easily identify companies that the general market is ignoring in the present, but are sure to rise when people come to know about the value of these companies.
Value investing is for you if you like to do research, and like to go off the beaten track. It is not easy to find value stocks that have been ignored by others in this age of information, but it is still possible to look for bargains, especially with the help of so many online tools that are available for your use.