What Is Investing Style?
Investing style is an overarching strategy or theory used by an investor to set asset allocation and choose individual securities for investment. Investing styles will typically account for the investors' risk tolerance, their investment time horizon, ethical values, and other considerations.
Key Takeaways
- Investing style refers to the specific strategies used to meet one's investment goals. Investing styles typically account for individual risk tolerance, time horizons, ethical values, and other considerations.
- Risk is a major factor in investment styles, with the riskiest investments offering higher potential returns.
- For investors who do not have the time or patience to manage their portfolio, managed accounts can offer hands-free portfolio management for a fee.
- While there is no one "right" investing style, there are many common pitfalls to avoid, such as gambling behaviors, emotional investing, and day trading. Regardless of individual preferences, each prospective investor should conduct due diligence on their investments.
Understanding Investing Style
Investing styles for individual investors are typically built from their risk tolerance, which can be generally classified as either conservative, moderate or aggressive. Risk is usually a primary concern for individual investors when determining an investing style and making investment decisions. Risk is also usually a key aspect of disclosure for investors when analyzing managed funds for investment.
Optimal Portfolios
Modern portfolio theory suggests that investors should be practicalin diversifying their investments in order to achieve optimal risk and return. Yetwith risk as a primary consideration, investors still have a multitude of investments for building a personal portfolio of individual securities or managed funds. In the investment universe, investors will find both securities and funds reporting characteristics that fit with an investor’s investing style.
Risk Profiles
When investing in individual securities, investors often look to stocks, bonds, and commodities. Each hasdifferent risk levels and investment characteristics. Conservative investors may seekindividual securities for income. Many stable, large-cap stocks pay dividends that provide for conservative to moderate risk with a steady income. Bonds can also be a top investmentfor income investors, as they providesteady payouts from coupon payments.
Within each asset class, investors will also find sub-asset classes that can guide their investing style. Within stocks, sub-asset classes may include growth or value. Within bonds, investors may choose to invest higher on the risk spectrum, with high-yield bonds, or more conservatively, with high-quality bonds.
Managed Accounts and Funds
Financial service providers and investment managers across the industry provide both managed accounts and managed funds that can support style or thematic investing.
Managed Accounts
Robo advisors, wrap accounts and separately managed accounts are all options for investors seeking support in managing to a certain investing style. Robo advisors and wrap accounts often base style investing on an investor’s risk profile, with active management also offering customized investing style options.
Managed Funds
Investing in managed funds can be one of the best ways to invest for style while also receiving the benefits of professional diversification. Most mutual funds and exchange-traded funds (ETFs) will employ a consistent investment style. Under the Investment Company Act of 1940, a manager's investment policies must be disclosed to investors in the fund’s prospectus, which is filed with its registration.
In the managed fund investment industry, investors will find all types of investment style options that generally fall into risk tolerance categories.
Passive vs. Active Funds
Among all risk categories, investors will also find passive versus active funds. Some investors may choose a passive investing style that offers exposure to various segments of the market often with lowercosts and lower risk.
An individual's investing style is different from the investment style of a mutual fund, which is typically determined by fund managers and disclosed in the fund's prospectus.
Examples of Investing Styles
Most investors will base their investment decisions based on their own perceptions of market risk and their individual investment goals. The following are some common investing styles, although most investors will combine these strategies into a unique investing style.
Value Investing
Value investing is a strategy that seeks companies or assets that are temporarily undervalued by the market, due to volatility, bad news, or other concerns. These are companies or shares whose market price is below their intrinsic value, determined from objective factors like income and assets. Based on the belief that the market will ultimately reflect the true value of these companies, value investors seek underpriced assets in the expectation of a price increase.
Growth Investing
Growth investors seek companies or assets with a high potential to gain value, based on perceived market trends and price trajectories. Growth investors typically seek small companies in young industries, that they believe are likely to gain value in the long run. Technology stocks and emerging markets are common targets for growth investors, based on the expectation of high average returns.
Income Investing
Income investing is a strategy that seeks to provide a steady income for the investor, rather than prioritizing capital growth. These investors will typically seek stocks with high dividends, in addition to fixed-income securities.
Due Diligence
Each investor will have theirown investing style and methodsformanaging investments. Do-it-yourself investors take a more independent approach, while investors using full-service financial advisory platforms tend torely on professional advice to shape their investing styles.
Regardless of the investing style one follows, due diligence is important for ensuring that an investment meets an investor's style. Choosing funds with clearly followed investment style objectives can help investors manage a targeted portfolio. Working with a financial advisor or investment service that deploys regular rebalancing can also help investors to avoid style drift and ensure their investments are maintained according to their investing style preferences.
