You might have a certain style when it comes to the clothes you wear, the cars you drive or the music you listen to. But what about how you invest your money?
It turns out that there are a number of different investing styles as well. Following is a look at four of the main styles of investing to help you determine which style fits you best.
1. Income Investing
The goal of income investing is to generate cash flow from your investments by owning stocks, bonds, real estate and other assets that pay a steady stream of income. As an income investor, you will look for companies that have consistently paid interest, dividends or distributions to shareholders and owners over time, including during times of duress.
When using the income style to invest for retirement, the income is usually reinvested to accelerate portfolio growth. Then when you retire, the income will become a kind of paycheck you can use to meet your retirement living expenses.
2. Value Investing
The goal here is to find companies that are currently trading at less than their intrinsic (or book) value. Often, these are companies that produce and sell everyday products like food, beverages, clothing and household goods. These are often referred to as consumer staples.
The demand for products like these usually remains steady, regardless of economic conditions or price changes. They are attractive to value investors because they may offer a consistent return that’s in line with, but not necessarily higher than, the overall market.
3. Growth Investing
As the name implies, growth investors aim to find companies with high potential for revenue growth. Sometimes these companies might not be earning any current revenue or even have a product ready to sell, but their future earning potential is considered to be high.
Many technology companies would fall under the growth category, including electric vehicle manufacturers, which is currently a hot industry among growth investors. While the potential of growth companies is relatively high, the risk is also usually higher and returns tend to be less consistent.
4. Momentum Investing
This style of investing involves charting the price of securities, assessing trends and then buying shares on the expectation that trends will continue on a similar path. If tech stocks have been on a roll, for example, you might try to ride this wave by buying more of them for your portfolio and then selling when you believe they have peaked.
Momentum investing seeks to capitalize on market volatility by taking short-term positions in securities on the rise and then selling them as soon as they show signs of slipping. Momentum investors look for buying opportunities in short-term uptrends and then sell when the momentum starts to fade. Some say that this investing style is the opposite of “buying low and selling high” — instead, it is sometimes referred to as “buying high and selling even higher.”
Choose a Style … and Stay with It
Each of these investing styles has a historical track record of both success and failure. One of the keys to success is choosing the right style based on your goals, time horizon and risk tolerance … and then staying with it. Chasing after different investing styles by “following the herd” or getting impatient can sometimes lead to underperformance.
Therefore, it’s usually wise to decide what is the right investing style for you and then stick to it. Sometimes, this might require battling FOMO, or the Fear of Missing Out. The key is to not compare your investment returns to your friend’s or neighbor’s, who might have vastly different goals, time horizons and risk tolerance than you do.