Are you ready to start investing but don’t know where to start? Contrary to what you may think, there isn’t a one-size-fits-all approach when choosing your investment strategy. Some people are risk-takers, some are risk-averse, and yet others fall somewhere in between the two.
The passive investor is the ‘set it and forget it’ investor. You don’t sit there and stare at the market all day long. You choose your investments and leave them be. You may use a robo-advisor that automatically rebalances your portfolio or invest in your IRA, but leave the investments for the long-term. You’re focused on long-term returns, not short-term gains.
- You don’t have to watch the market like a hawk
- You can ride out the highs and lows of the market
- Anyone can be a passive investor
- Your gains won’t be as big as an active investor’s gains
- You may lose out on major swings one way or the other in the market
The active investor or day trader trades often. You are more interested in short-term gains and you thrive on market volatility. You have a much higher tolerance for risk and want to actively manage your portfolio yourself. Your goal is to outperform the market, not just mimic what the major indexes do.
- You get to take advantage of the market’s highs and lows by investing strategically
- You stand to make big gains in a short time
- You can buy and sell often
- The losses can be a lot bigger with strategies gone wrong
- You have to watch the market like a hawk if you want it to work
The dividend investor focuses his investments on companies that pay dividends in addition to the stock growth. Dividends are profits the company shares with its shareholders. Companies pay them out typically quarterly, but sometimes annually too.
- Dividends provide a steady stream of income
- Dividend stocks are usually high performing stocks
- You can reinvest the dividends to further your profits
- There’s no guarantee a company will be able to pay dividends
- Not all companies offer dividends
A Combination of Investors
Some investors like to take a combined approach to the investment strategy. They want the flexibility of the active investor that can actively trade investments, but the laid back approach of the passive investor. The combination investor diversifies his portfolio with a variety of investments that can be both actively and passively managed.
- You get the best of both worlds, growing your income potential
- You get to see what both types of investment practices are like before choosing one
- You diversify your portfolio to minimize your losses
- It may be more work to do both active and passive investing
- You may have to choose one way or the other if it gets too confusing
Play with the different investment styles until you find the one that fits you the most. Choose the investment strategy that you make the most profits, but also feel the most comfortable managing, as investing should be a way to increase your income, but not your stress.