What Is Investment Style?


Investment style is the method and philosophy followed by an investor or money manager in selecting investments for a portfolio.

Investment style is based on several factors and typically tends to be based on parameters such as risk preference, growth vs. value orientation, and/or market cap.

The investment style of a mutual fund helps set expectations for risk and performance potential. Investment style is also an important aspect used by institutional managers in marketing and advertising the fund to investors looking for a specific type of market exposure.

  1. How to Choose an Investment Strategy-

There are a number of factors that go into choosing the investment strategy that will work best for you. One thing is to think about whether you want to choose an active or passive investing strategy.

Active investing involves the frequent buying and selling of stocks. It requires hands-on management, often by a portfolio manager who can delve into various factors to forecast the market.

Passive strategies, on the other hand, are focused on buying and holding investments for the long haul. Proponents of passive strategies argue this cuts down on trading costs and increases tax efficiency.

It also tends to be less risky than market-timing strategies, which can reap big rewards by trying to beat the market but also suffer big losses. Oftentimes, portfolios will blend active and passive investing.

  • Growth Investing-

Growth investing is an investment strategy that focuses on building capital through buying equities that have the potential to increase in value. This is most commonly found in stocks where investors believe the value of the company, and thus the value of the shares they’ve purchased is likely to go up.

Growth investing contains several sub-strategies. Two of the most common are short-term investments and long-term investments.

Short-term generally means buying stocks and holding them for less than a year. Investors use short-term growth investments when they think a company’s value is likely to shoot up quickly.

Long-term investments, on the other hand, are held for more than a year. Investors use these when they believe the company’s value will grow slowly and steadily over the years.

  • Active Investing-

An active investing style might be right for you if you have a higher tolerance for risk and keep a close eye on market trends and movements.

Active investing is generally used by investors who aren’t as concerned with the long-term horizon as they are with the present. With this strategy, you select specific stocks and use market timing to try to outperform the market to seek short-term profits.

  • Income Investing-

Income investing focuses on generating a steady income from your investments. Rather than seeking stocks that will grow in value and give your portfolio more hypothetical value but make you no richer in terms of cash, income investing wants to find investments where your portfolio sees real-world value in the form of money in your pocket.

  • Socially Responsible Investing-

The previous investment strategies focus more so on how an investor makes money. This investing strategy is a bit different in that it takes a broader look at how your investment can impact the world at large, beyond your portfolio.

You can tailor a socially responsible investing strategy to what you personally care about when it comes to social responsibility. If you are an environmentalist, for instance, you might invest heavily in green companies and avoid investing in companies that deal in fossil fuels. If you care about foreign policy, you might avoid companies that do business in certain countries.

  • Small Cap Investing-

Small-cap investing focuses on companies with a market cap that is, a total value between $250 million and $2 billion. This means you don’t invest in the companies that many investors focus on (think Apple, Ford, IBM, etc.) and instead on smaller companies you think could do well in the future.

Small-cap companies often have few shares available for public purchase. Because institutional investors generally don’t want to own too big of a percentage of a company, they might shy away from the companies, giving individual investors a leg up.

  • The Bottom Line-

There is no easy way to pick which investing strategy you should choose when building your own portfolio. You might end up with a mix of sorts. For instance, you might primarily build your portfolio around growth investments, but include some income investments as a way of guaranteeing yourself some more cash you can either use in your everyday life or reinvest to increase your income generation.

The best way to pick an investing strategy is to think about your financial and personal goals. Then figure out which strategy is most likely to help you achieve those goals.

2. Risk-Based Investment Styles-

  • Conservative-

Conservative funds will often have investment styles focused around income and fixed-income investments. Investments in this category can include money market funds, loan funds, and bond funds. Conservative funds are generally good as income investments as well, with many paying interest distributions or reinvesting in capital appreciation growth.

In the fixed income category, managers will focus on offering funds by duration and credit quality. While fixed income credit investments are generally considered conservative, higher-yielding lower-credit-quality investments would be the most aggressive style of funds offered for investors with conservative to moderate risk tolerance.

  • Moderate-

Many moderate-risk investors will be attracted to managed funds with large-cap, blue-chip securities, or a value investment style. Large-cap, blue-chip stocks can attract income investors since they are mature businesses with committed dividend payout ratios and steady dividends.

Value funds may offer income as well. Generally, value stocks have moderate risk with fundamental characteristics that show their market values discounted from their intrinsic value. Based on deep fundamental analysis and long-term assumptions, value investments can be a good core holding for all types of investors and are especially attractive in the moderate risk category.

  • Aggressive-

Growth funds, aggressive growth funds, capital opportunity funds, and alternative hedge fund investment styles that have broader flexibility to utilize leverage and derivatives are some of the most appealing managed fund investment styles for aggressive investors.

These funds are typically actively managed funds that seek to outperform market benchmarks. Aggressive funds may also encompass broad investment universes for greater return potential.

In some cases, this can include global securities or international securities actively managed and focused on high growth regions of the world, such as the emerging markets, BRIC countries, or Asia ex-Japan.

also read: Five Places You Can Invest Your Money

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