What's Your Investing Style?
Know yourself before you make a move.
In any endeavor, it's important to "know thyself." In the context of participating in financial markets, identifying your investing style is central to self-understanding.
Mapping Investment Styles
Figure 1 portrays one way to dimensionalize the investment-style landscape. The horizontal axis reflects time horizon, or preference for investment projects of various durations. For example, do you prefer to buy stocks like Caterpillar (CAT), Intel (INTC), or Wells Fargo (WFC) and sell them in the near future after a small rise in price (short term horizon), or are you a buy-and-hold type, eying multi-year appreciation potential (long term horizon)?
The vertical axis reflects preference for involvement in investment decisions. Do you like to follow markets routinely and pull the trigger on asset purchases and sales personally (active preference), or are you prone to take a hands-off approach and let someone else do the work?
Crossing these two dimensions maps various categorical investment styles. Quadrant 1 signifies what we might call Hoarders. Hoarders, because of their short-time horizons and passive involvement preferences, typically gravitate toward assets with low-risk profiles, such as money market funds, certificates of deposit (CDs), bonds, and other fixed-income instruments. Such instruments align with Hoarders' short-time horizon while reducing the requirement for frequent attention. For those positions requiring more attention, Hoarders defer to financial advisers or fund managers.
Quadrant 2 characterizes Providers. Long-time horizons attract Providers toward equities and other risky asset classes that typically require time to pay off. Providers, however, are not particularly interested in hands-on involvement in routine market flow. Instead, this group provides capital to agents (financial advisers, mutual fund managers, hedge fund managers, etc.) for investment purposes. Rather than actively managing their own accounts, Providers usually defer to professionals for advice and decision-making.
Those possessing short-time horizons and hands-on preference tend to occupy Quadrant 3 as Traders. Traders are attracted to equities and other risky assets, but short-time preference finds them frequently buying and selling positions in order to balance risk and reward. Traders enjoy immersing themselves in market minutiae, and are likely to actively manage their own accounts.
Quadrant 4 represents Allocators. Long-time horizon preferences attract Allocators to risky asset classes such as equities. Allocators also enjoy immersion in the routine market flow. Rather than relying on agents, this group prefers to allocate capital themselves. Similar to Providers, Allocators hold investment positions for considerable time (much longer than Traders) in anticipation of payoff. Allocators are likely to manage their own accounts. When working with agents, Allocators retain primary decision-making authority.
A variety of factors influence investment style, such as age, market experience, interest in investing, wealth level, market climate, and risk tolerance. Because levels of these factors are likely to change over time, you may periodically find your investment style migrating to a different category. Personally, my journey has taken me from Provider to Trader to Allocator. As I get closer to retirement, perhaps I'll morph into more of a Hoarder.
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