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What Kind of Investor are You?

Tuesday, January 05, 2021 04:14 PM | Nick Dey
What Kind of Investor are You?

Having a plan is an important part of any success story.

While the most-memorable moments often come when a plan unexpectedly changes, this is no excuse for not having a plan to begin with, especially when investing.

Money invested is one thing first and foremost: money. Unless you are lucky enough to live with an excess amount of money, it is important to protect it and its growth as much as possible. Money invested in the market is often, in a way, "spent-money" because along with the investment vehicle comes its purpose or goal, such as funding your next car, retirement, kids college funds or any number of other medium and longer-term goals.

Because of the underlying importance of money invested, the wise words of founding father Benjamin Franklin that "by failing to prepare, you are preparing to fail" should be heeded by all money-conscious investors. Doing so will maximize your returns while minimizing your losses, all while helping you do the most important part of it all faster, reaching your goal.

Because of this, it is important to find the style of investing that works best for your risk preferences and schedule. Knowing what kind of investor you are will help you stay focused on the right variables during your stock-selection process and keep you from getting drawn into a trade for the wrong reasons.

Along the way to your goals, there will be plenty of temptation to deviate away from your plan. An example of this could be a value investor tempted by an IPO happening today that they think is a sure win as a momentum trade. The IPO could play out in their favor, and give them a hefty reward for their confidence in the trade. But, it’s quite possible that this trade will not be a resounding success and could put a trader that is not used to being in the position of having to scrupulously watch prices, ready to cut their losses at any moment.

With this in mind, you should explore which of the four major stock investing styles best fits your risk preferences and desired time commitment.

Value Investing:

Value investors scour the market for stocks that they think are undervalued. These investors assume, unlike some of their counterparts, that prices are not always a reflection of all the available data and that sometimes the market can get it wrong.

Because of this, value investors are bargain investors. Value investing tends to be a longer-term investing strategy. This is because these investors are betting the masses got it wrong, but at some point, prices will correct and their bargain stocks will be valued appropriately.

These switches in perception can happen overnight, especially before an earnings date, but will usually take several earnings beats and some flattering news before the masses are actually swayed. Value investors separate themselves from the rest through their undying loyalty to companies they believe in and their willingness to stay around for the long-haul. If you’re stubborn and really, really like yelling “I told you so” at the wind, this may be the right strategy for you.

Growth Investing:

Another strategy, growth investing, aims to invest in companies that the investors believe will grow a lot. These investors assume, for the most part, that today’s price is fair for today, but is cheap compared to what it will be later on. While this seems very speculative, and it is compared to value investing, it is less so than you’d expect. By monitoring a company’s financial performance and industry trends, growth investors make educated investments that limit the risk they carry.

Growth investors are looking for the "next big thing" and are likely people who love the latest technology and wondering about what the future looks like. Investors using this strategy are longer term in nature. This strategy can require you to be extra wary of bubbles because they often form as hype grows around a new technology.

Momentum Investing:

Momentum investors are high-flying traders that aim to profit from a swing in a stock’s price. These investors examine the stock’s historical prices to uncover patterns that help them predict how long a rally, or fall, will continue, as well as when the optimal time is to enter and exit the trade.

These traders have nerves of steel and live on the adrenaline rush that comes from living on the edge. Momentum trades are intense moments that can last anywhere from a few minutes to weeks.

Does running with the bulls in Pamplona appeal to you? If so, then you may enjoy running with the bulls on Wall Street as well.

Dollar-Cost Averaging Investing:

Dollar-Cost Averaging (DCA) is an approach which involves regular investments over a long period of time and can be inclusive of one of the other methods listed above. These investors invest their money on a strict regimen, often in a manner which requires minimal oversight on their part.

One of the biggest advantages to this strategy is that it voids investors of having to worry about their timing because they invest on a regular, scheduled basis. These investors trade the ability to time their investments for an automated process that saves time and stress.

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