6 Investment Styles: Which Fits You? (2024)

Do you know what your investment style is? If you're like most investors, you probably haven't given it much thought. Yet, gaining a basic understanding of the major investment styles is one of the fastest ways to make sense out of the thousands of investments available in the market today.

The major investment styles can be broken down into three dimensions: active vs. passive management, growth vs. value investing, and small cap vs. large cap companies. Walking through each one and assessing your preferences will give you a quick idea of what investment styles fit your personality.

Active or Passive Management

In determining investment style, an investor should first consider the degree to which they believe that financial experts can create greater than normal returns.

Investors who want to have professional money managers carefully select their holdings will be interested in active management. Actively managed funds typically have a full time staff of financial researchers and portfolio managers who are constantly seeking to gain larger returns for investors. Since investors must pay for the expertise of this staff, actively managed funds typically charge higher expenses than passively managed funds.

Some investors doubt the abilities of active managers in their quest for outsized returns. This position rest primarily on empirical research shows that, over the long run, many passive funds earn better returns for their investors than do similar actively managed funds. Passively managed funds have a built-in advantage—since they do not require researchers, fund expenses are often very low.

Growth or Value Investing

The next question investors must consider is whether they prefer to invest in fast-growing firms or underpriced industry leaders. To determine which category a company belongs to, analysts look at a set of financial metrics and use judgment to determine which label fits best.

The growth style of investing looks for firms that have high earnings growth rates, high return on equity, high profit margins and low dividend yields. The idea is that if a firm has all of these characteristics, it is often an innovator in its field and making lots of money. It is thus growing very quickly, and reinvesting most or all of its earnings to fuel continued growth in the future.

The value style of investing is focused on buying a strong firm at a good price. Thus, analysts look for a low price to earnings ratio, low price to sales ratio, and generally a higher dividend yield. The main ratios for the value style show how this style is very concerned about the price at which investors buy in.

Small Cap or Large Cap Companies

The final question for investors relates to their preference for investing in either small or large companies. The measurement of a company's size is called "market capitalization" or "cap" for short. Market capitalization is the number of shares of stock a company has outstanding, multiplied by the share price.

Some investors feel that small cap companies should be able to deliver better returns because they have greater opportunities for growth and are more agile. However, the potential for greater returns in small caps comes with greater risk. Among other things, smaller firms have fewer resources and often have less diversified business lines. Share prices can vary much more widely, causing large gains or large losses. Thus, investors must be comfortable with taking on this additional level of risk if they want to tap into a potential for greater returns.

More risk averse investors may find greater comfort in more dependable large cap stocks. Amongst the names of large caps, you will find many common names, such as GE, Microsoft, and Exxon Mobil. These firms have been around for a while, and have become the 500 pound gorillas in their industries. These companies may be unable to grow as quickly, since they are already so large. However, they also aren't likely to go out of business without warning. From large caps, investors can expect slightly lower returns than with small caps, but less risk, as well.

The Bottom Line

Investors should think carefully about where they stand on each of these three dimensions of investment style. Clearly defining the investment style that fits you will help you select investments that you will feel comfortable holding for the long term.

6 Investment Styles: Which Fits You? (2024)

FAQs

What are the six 6 different types of investment? ›

Different Types of Investments
  • Mutual fund Investment. As an investor, you have a variety of options to choose from when it comes to parking your funds to generate returns. ...
  • Stocks. ...
  • Bonds. ...
  • Exchange Traded Funds (ETFs) ...
  • Fixed deposits. ...
  • Retirement planning. ...
  • Cash and cash equivalents. ...
  • Real estate Investment.

How do I decide which type of investment is best for me? ›

Some options include individual stocks and bonds, ETFs, and mutual funds. Choose what's right for you according to your risk tolerance and your goal's time horizon. Review your investments regularly. As your life changes, so can your risk tolerance and goals.

How do I choose an investment style? ›

Investment style is based on several factors and typically tends to be based on parameters such as risk preference, growth vs. value orientation, and/or market cap. The investment style of a mutual fund helps set expectations for risk and performance potential.

Which investment suits me? ›

There is no best-fit strategy, as everyone differs in their risk appetite and financial objective. However, if you want to invest for short-term goals, say 1-3 years, then you can look at low-risk options like bank fixed deposits, liquid funds, ET, money earn, etc.

What are the three major types of investment styles? ›

The major investment styles can be broken down into three dimensions: active vs. passive management, growth vs. value investing, and small cap vs. large cap companies.

What is the safest investment with the highest return? ›

These seven low-risk but potentially high-return investment options can get the job done:
  • Money market funds.
  • Dividend stocks.
  • Bank certificates of deposit.
  • Annuities.
  • Bond funds.
  • High-yield savings accounts.
  • 60/40 mix of stocks and bonds.
May 13, 2024

Which type of investment is best for beginners? ›

10 ways to invest money for beginners
  1. High-yield savings accounts. A high-yield savings account enables you to earn far more interest than you could with a traditional savings account. ...
  2. Money market accounts. ...
  3. Certificates of deposit (CDs) ...
  4. Workplace retirement plans. ...
  5. Traditional IRAs. ...
  6. Roth IRAs. ...
  7. Stocks. ...
  8. Bonds.
May 23, 2024

How do I choose between investments? ›

One rule of thumb for deciding where to invest your money and how to split your portfolio between stocks and bonds is to subtract your age from 100, and put the result — as a percentage of your pot of money — into stocks. So if you're 30, that would mean investing 70% in stocks and the rest in bonds.

What is a good portfolio mix? ›

Many financial advisors recommend a 60/40 asset allocation between stocks and fixed income to take advantage of growth while keeping up your defenses.

What is a core investment style? ›

A core holding is just what it sounds like: It's the central part of your portfolio. The core requires investments that will be reliable year in and year out. They're the solid foundation for the rest of a portfolio. To reach your investment goals, your portfolio needs a solid, reliable core. The rest is often frills.

What does a good portfolio look like? ›

A diversified portfolio should have a broad mix of investments. For years, many financial advisors recommended building a 60/40 portfolio, allocating 60% of capital to stocks and 40% to fixed-income investments such as bonds. Meanwhile, others have argued for more stock exposure, especially for younger investors.

Which investment is best for me? ›

11 best investments right now
  • Money market funds.
  • Mutual funds.
  • Index Funds.
  • Exchange-traded funds.
  • Stocks.
  • Alternative investments.
  • Cryptocurrencies.
  • Real estate.
May 22, 2024

What is the best investment for life? ›

The 10 best long-term investments
  • Bond funds.
  • Dividend stocks.
  • Value stocks.
  • Target-date funds.
  • Real estate.
  • Small-cap stocks.
  • Robo-advisor portfolio.
  • Roth IRA.

Which investment has the highest return? ›

Treasury Bills. The Government of India issues Treasury Bills to raise funds for up to 365 days. It is considered an investment with the best returns. Since the government gives these, they are considered very safe.

What are the different types of investments? ›

Investments are generally bucketed into three major categories: stocks, bonds and cash equivalents. There are many different types of investments within each bucket. Here are six types of investments you might consider for long-term growth, and what you should know about each.

What are the 9 types of investment risk? ›

9 types of investment risk
  • Market risk. The risk of investments declining in value because of economic developments or other events that affect the entire market. ...
  • Liquidity risk. ...
  • Concentration risk. ...
  • Credit risk. ...
  • Reinvestment risk. ...
  • Inflation risk. ...
  • Horizon risk. ...
  • Longevity risk.
Sep 26, 2023

What is investment and its types? ›

Investment refers to putting your money in an asset with the aim of generating income. Financial investments come in different forms, such as mutual funds, unit linked investment plans, endowment plans, stocks, bonds and more.

What are the 5 investment guidelines? ›

  • Invest early. Starting early is one of the best ways to build wealth. ...
  • Invest regularly. Investing often is just as important as starting early. ...
  • Invest enough. Achieving your long-term financial goals begins with saving enough today. ...
  • Have a plan. ...
  • Diversify your portfolio.

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