Ever wondered what kind of investor you are?
Are you the kind of investor who will always pick the right stock and the company will grow very quickly after you picked it? Do you have the Midas touch?
Well sadly, this is only true in movies.
For this article on investing
I am going to mainly talk about investing and using stocks as my reference. Before we begin, let’s look at some common terms that you might have heard of.
- Buy & Hold
This is a strategy where you do your research to find a great stock, then you buy that stock and hold it forever. You just keep letting it go higher and higher. You have to check in occasionally to make sure the fundamentals are still good and this is a long term strategy.
- Value investing
Here is a strategy where you buy a stock because it is undervalued to you. You did your calculations and you found that the current price of the stock is cheaper compared to the actual price (or intrinsic value) it should be at. You will sell your stock when the current price goes above the intrinsic value by a large amount, making it overvalued or overpriced. The timeframe will for as long as your stock is underpriced, which is hard to say. Generally this is a long strategy.
- Dividend investing
You will look for companies that have a history of paying out dividends and with have a high dividend payout ratio. You will keep buying and increases the number of stocks you have in these companies and just collect the dividends from them. This will be a long term strategy.
The 3 strategies above uses more of fundamental analysis in applying them. You can check out an article here on a very simple understanding of FA and how it compares to technical analysis. Here are 3 other strategies that are for a shorter time frame and uses more of technical analysis as the base for the strategy.
- Swing trading
This strategy uses the typical movement of a stock. As stocks never directly move up or move down, their short term movement can be tracked. There are many variations but they use patterns to get their signals and their time frame can be from a few days to a few weeks.
- Day trading
This is a form of trading where the investor will not hold a stock or hold a position for longer than a day. The buying and selling are all done within a day and I honestly don’t know much about this. This is just a super fast strategy.
- Trend following
This is one of the easiest strategy available. You buy a stock when it is on an uptrend and sell or short a stock when it is on a downtrend. You will use technical indicators to provide signals and this is normally a long term strategy, depending on how long your trend lasts.
The 6 strategies above are just terms that you have probably heard before but you do not have to be classified by them.
Here’s what I really think matters in finding out what kind of investor you are.
How comfortable you are with risk and how much work are you willing to put in to learn about a stock.
I personally believe that there is no one fixed kind of investing strategy that suits everyone, because we are all different. Let me give you an example. I am sure you would have heard of using, (100 – your age) to find out what is the percentage of your capital that you should invest in stocks and the remaining going to other safer types of investment.
But is this honestly true?
What if I am 25 years old and I am not comfortable with putting 75% of my total investing capital into stocks? What if I don’t like stocks and I prefer to use other safer investing instruments to grow my money at a safer but slower pace?
My first point!
This brings me to the first point of finding out what kind of investor you are, determine your risk tolerance!
One way to do this is to find out through a hypothetical scenario or when you invest, what is the amount of money that you are comfortable investing and yet you can sleep peacefully at night?
Some people are fine with leaving 20k in the markets while others can’t get a good night’s sleep knowing that they have 10k in the market. (I understand that risk is based on many factors and not how much you invest in the markets, but this is just an example)
Your risk tolerance plays a huge part in finding out the type of investor you are and the type of strategy you will be most comfortable with.
My second point!
How much work you are willing to put in.
The more information you have about a stock, the better investing decision you can make.
If you can find out what the company does, how are its financials, what are the future prospect, what is the trend the company is in. All these information will give you more knowledge to make better investing decisions.
However to get more information means you will have to spend time researching and learning about a company. Reading their annual reports and comparing key ratios to get an idea of how a company is doing.
Some people don’t like the work. They don’t like looking at numbers, they don’t like looking at annual reports to find out what the CEO is saying (This is really boring and dry stuff) This is a very time consuming process so most people might not have the time to do it. Luckily, there are also forms of “lazier” investing. You don’t have to put in so much effort, but your returns will definitely be average (Although who says average is a bad thing)
Here are some simple ways to show you what you can invest in based on your preference.
- Long term, lazy investor
Look to invest in the stock market index. You can buy exchange traded funds or ETF to do so. Look at this post from Nick to get a better idea of ETFs. The average annualized growth rate of the US indexes has been about 7% for almost the past 30 years. Use this to confirm it for yourself. What you want to do is to invest in an ETF and keep increasing your position every year. You can do this by using a dollar cost averaging method, putting a fixed amount into your ETF periodically.
Keep in mind though, this kind of investing works best when you are leaving your money inside for at least 10 years (I would recommend 15) As in the short term the markets can go down but in the long term, the markets always move up. This method also works well with a small initial capital as you will rarely make a lot of trades so the commission fees are at a minimum.
- Long term, don’t mind doing work
This for the investors who don’t mind getting their hands dirty and have the time to research and learn about the companies. You will have to know fundamental or technical analysis as you will have to spend time looking at the company’s financials or looking at the charts.
You can use any of the 3 FA methods mentioned on top and for TA, it will be trend following, where the time frame depends on the trend.
This is a method that would require patience as you have to wait for the right signals. You will not make a lot of trades, as your returns will be better. You will face slightly higher commission fees but it should still work well with a small capital.
- Short term, must do work (No lazy method here)
For the short term strategy, it is mainly based on swing trading and day trading. This is mainly for investors who are comfortable with always looking at the markets to spot any movement or potential reversals. This strategy works mainly on TA and investors can also use systems or screeners to help them quickly find stocks.
You need to enjoy the process of frequently looking at charts and the commission fees will be quite high so a larger initial capital is important for this strategy to be effective.
I hope after reading this you now have a better idea of what kind of investor you really are and what method would suit you better! It is difficult to exactly define what strategy works best for you, unless you try them out for yourself. This is the only way to see what you are comfortable with.
As always thanks for reading and let me know in the comments below what kind of investing method do you prefer most. Are you a long term or short term investor? What has been your best investment to date?