Investors are typically defined by their risk tolerance, age and time horizon until retirement--all key characteristics of your investing profile. Less understood but perhaps more important is to know your preferred style of investing.
Understanding your investment style will help you navigate a marketplace with an overwhelming number of investments and choose those that make the most sense for you. It will also help you determine when is the best time to buy and sell.
Three Main Investment Styles
There are essentially three main investment styles: Value, Growth and Growth At A Reasonable Price, also know as GARP. At different times in a market cycle or even different points in a year some styles of investing outperform others. Read through and see what best describes your approach to investing.
Value investors are always looking for deep discounts and refuse to pay a premium for growth. The objective is to buy under-priced strong performers. This means in many cases, looking for stocks with a low price to earnings ratio. The current climate is challenging for value investors because prices are high as people chase hot high growth brands. That’s why you’re seeing value mutual fund managers with a higher weighting of cash in their portfolios. Their returns aren’t as good as of late because money is moving out of value stocks and into those companies that have just exploded.
Growth investors seek out stocks that are climbing. These companies are fast growing, often because they are disrupting the status quo through game-changing innovations. Investors are willing to pay a premium for that good story, which is what we’re seeing today. They are looking for firms that are outperforming when it comes to earnings and return on equity. Profit margins are high and dividends are low.
GARP investors fall somewhere in between. They will buy a stock on the rise if it’s reasonable. To determine they aren’t over-paying, they will look at a stock’s peer group, its history, earnings growth and price.
Everyone is always seeking growth. It’s a matter of what you are willing to pay for that growth. That’s the difference between each of the investing styles.
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When you hire an investment advisor, you should understand which style of management they work with and make sure it aligns with yours. For example, I am a value investor. I want investments that are cheap, pay a good dividend and will earn a consistent 7% to 10% return over time. I make a point of helping my clients assess their own style to ensure they have the right expectations of what they want their investments to do for them.
read all articles in Allan Small's Prime Earning Years Series ----------
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