Each investor has their own goals and unique reasons for investing. Investors would be wise to always do their best to make investment decisions based on those individual goals.
Investors looking for capital growth for an early retirement should look for strong buy-and-hold opportunities as opposed to making a few short-term high-risk trades. Meanwhile, traders looking for extra income should be heavily prioritizing high-dividend stocks and bonds instead of small tech startups. There are many aspects that affect investment decisions for each investor but traders often fall into six broad categories.
Most common is perhaps growth investors who are looking for capital appreciation in their investment portfolio. Buy low and sell high is the motto here or just buy low and watch the price continually rise (hopefully). Whether an investor is starting with $1 million or $10 in their account, the objective remains the same. It's an individual’s risk tolerance and time horizon that are the biggest factors in determining how aggressive a strategy to adopt.
Growth investors fall into three categories of High-Growth, Balanced-Growth, and Conservative-Growth. Higher risk tolerances will tend towards higher growth and balanced growth strategies while investors looking to minimize risk will fall into the conservative group.
Meanwhile, a longer time horizon most commonly associated with younger investors who are investing for retirement and/or a child’s education will allow for more aggressive growth as short-term market volatility is offset with long-term holding periods. The stock market has gone through many bearish periods in its time but has recovered from every bear market and has continued to grow over the long term. The coronavirus saw the stock market crash in response to the pandemic but managed to reach new highs just six months later. Older investors with shorter holding periods though may go towards a conservative growth strategy that minimizes volatility in case of an upcoming bear market.
Extra Income and Wealth Preservation
Traders not looking exclusively for capital appreciation most often have two other reasons for investing, side income and wealth management.
High-Return investors looking for extra income will usually heavily weigh a portfolio towards high-dividend stocks, bonds, and other assets that make regular cash payments. Depending on the reasons for investing, high-return investors may reinvest any dividend payments or cash out and treat it as an extra source of income. These traders often have lower risk tolerances but ones with a higher tolerance may invest more heavily in real estate investment trusts (REITs) that are a bit more risky but can offer very strong dividend yields.
One thing to watch out for REITs and other more volatile stocks though is dividend yields can sometimes be deceiving if using past dividend payments and the stock has recently dropped in price. The lower price will push the dividend yield higher but there’s no guarantee that future dividends will remain the same.
Wealth-Management investors meanwhile often have the shortest time horizons and lowest risk tolerance as they’re looking for financial security and to preserve assets. These traders might be close to retirement and are looking to minimize volatility with stable companies that may offer strong dividends to offset a lack of potential appreciation that technology and cyclical stocks may provide.
Last but not least is the Dynamic investor who has many different reasons for investing or doesn’t quite know yet what they are looking for. Newer investors looking to invest for fun and experience can fall into this category while veteran traders who change their goals depending on the business cycle can be dynamic investors as well. Dynamic traders may accept higher risks during bullish runs and then reallocate their portfolio to defensive stocks with limited upside potential when markets are turning bearish.
Dynamic investors change with the times and may switch to higher dividend stocks if extra income is a goal one month while reallocating back into big tech when looking for capital appreciation the next month.
There are millions of investors with their own unique qualities and will most likely not be perfectly defined into one of six groups for their entire life. Knowing which group an investor closely aligns with though can help them get started on their personal investment journey. Investing can be daunting but is often more simple than many “experts” like to portray it. Know the reasons for investing and invest in companies you believe will succeed based on what’s important to those goals.