Knowing yourself is very crucial when it comes to investing. You have to know yourself, your emotions and your stress tolerance to be able to invest with utmost logic and reason. And the biggest mistake people make when investing is that they don’t know what kind of investor they are or should be. So, that’s why I am going to go through the different types of investors in this article.
There are a lot of different types of investors, but today we are going to talk about the two types of investors that are the most suitable for the regular investor. You probably guessed it by the title, it’s the passive and aggressive investor. Now there are other types of investors, but when it comes to stocks, bonds and options, then these are the overall best types of investors. That is if they are played right.
The Passive Investor
First, we have the passive investor. A passive investor is an individual or entity who invests in financial markets with the goal of achieving long-term returns, but with minimal involvement in the management of their investments. This approach contrasts with aggressive investing, where the investor frequently trades and manages their portfolio to outperform the market. Passive investing is on the other hand a form of investing that aims to get a higher return over a longer period of time, usually in the span of 10-30 years or even more.
Passive investors typically invest in low-cost index funds or exchange-traded funds (ETFs) that track a broad market index, such as the S&P 500. This approach allows them to achieve market returns with lower fees and without the need for constant monitoring and management.
Passive investing has become increasingly popular in recent years, as research has shown that most actively managed funds do not outperform the market over the long term. Additionally, the low fees associated with passive investing can lead to higher returns for the investor over time.
The passive investor is more suited to the investors that do not like to get actively involved, don’t have the time to be constantly involved, or simply do not like the stress and anxiety that comes with being actively involved, and most of all can’t really control their emotions when it comes to investing. Now, to be perfectly honest, most people should fall into the category of passive investing. And don’t get me wrong, it is a perfectly good investing strategy, and probably the smarter one for most people. The problem is that people tend to not know which category they should follow and furthermore end up investing in a way that does not suit them at all.
Funny enough, your portfolio should look boring if you are a passive investor. Your portfolio should be diversified over multiple markets like stocks, commodities, bonds, real estate and so on. And you should almost not buy individual stocks at all, only index funds that cover markets. Now there are exceptions like having a few individual stocks (in addition to the rest of the portfolio) that you have done a lot of research on, and you know well enough to invest in, and they probably should be paying dividends as well. But index funds are the main option when it comes to stocks for the passive investor. Individual Stocks should only be the option if you are well educated on the subject, and you know their business like you work there.
Overall, passive investing is a simple and cost-effective approach for individuals looking to build long-term wealth, without the need for constant monitoring and management.
The Aggressive Investor
And now over to the aggressive investor. An aggressive investor is an individual or entity who takes a hands-on approach to investing, actively managing and monitoring their portfolio to outperform the market. This approach contrasts with passive investing, where the focus is on achieving long-term returns with minimal involvement in the management of investments. Aggressive investing is on the other hand a form of active investment that aims to give short, or mid-term returns within a long-term goal. Meaning, that you are essentially investing in the span of 1-5 years, or even shorter to get a high return to moreover get a lot of capital.
Aggressive investors often invest in individual stocks, bonds, or other securities, and regularly buy and sell investments based on market trends, economic conditions, and company performance. They aim to generate higher returns than those achieved through passive investment strategies, such as index funds or exchange-traded funds (ETFs).
–The Top 10 Stocks To Watch For Long-Term Growth
Aggressive investing requires a significant level of knowledge and experience in the financial markets, as well as the ability to closely monitor and manage investments. It is important for active investors to have a clear investment strategy and to be able to identify and capitalize on market opportunities.
While aggressive investing has the potential to produce higher returns, it also comes with a higher level of risk. The market can be volatile, and individual stocks or bonds can experience sudden losses, leading to substantial losses for the active investor.
Now, the portfolio to the active investor is a bit more fun. The portfolio should still be diversified over multiple markets like different business branches and other markets. And usually there is not a lot of activity on a day-to-day basis, but there is a lot more activity than that of the passive investor. And again, the investments that are being chosen should have solid ground and been done fair amount of research on.
Overall, aggressive investing is a suitable approach for individuals who are willing to take a hands-on approach to investing, and who have the knowledge, experience, and ability to closely monitor and manage their investments. It is important to consider one’s financial goals, risk tolerance, and investment knowledge before pursuing an active investment strategy
Either which one of the strategies you use, you should remember to always dollar cost average and make sure to have control of your taxes, because both of these play a big role in your returns. When it comes to dollar cost averaging, it is probably more important for the passive investor.
Dollar cost averaging is essentially, selling the part of your portfolio that has grown, and diversifying it in accordance with what your initial portfolio diversification was. An example: Let’s say I am invested 50% in stocks and 50% in bonds. If my stocks rise 10% in value and bonds stay relatively the same, then my portfolio is now 55% stocks and 45% bonds. So, to fix this I will sell off enough stocks to make the portfolio 50/50 again. Now, don’t get me wrong, you should only dollar–cost average somewhat annually.
When it comes to taxes, there are some loopholes that can be used. For example, if the end of the year is coming, and you have some positions that are at a loss. Then you can sell those positions for a loss and report it for taxes and have a deduction in your taxes. And furthermore, wait until next year or some 30 days after reporting the taxes and then buy back into the same position. Only now you have reduced your taxes and you still have your stocks.
An example could be: You bought 10,000 shares of Cola stock at 60$ a stock in January (Valuation: 600,000$), but the stock has gone down to 50$ and you now have a loss of 100,000$ and its December. And then you sell all the Cola stocks, reporting a loss of 100,000$. (Let’s say you were initially going to pay 150,000$ in taxes) And furthermore you report it on your taxes, and you now only pay 50,000$ in taxes, and when the new year comes around then you buy back 10,000 shares of Cola at 50$. This essentially means that you have saved paying an extra 100,000$ in taxes and you have now gotten a better position for your Cola shares.
So, remember that by taking the time to learn taxes and make smart decisions, you can save yourself a lot of money.
Now back to the strategies. When we compare the two investing strategies, the obvious answer is that it can’t be decided, because both strategies when used right produce a high level of return. Yes, the active investor might get it in a shorter amount of time (If done right), but the passive investor has a lot less risk, and can be done on autopilot.
That is probably a boring answer that you didn’t come here to get, so here is another one. The best strategy is decided based on what your own characteristics are, how your brain works and what level of dedication you are willing to give. Based out of that, I can say with my whole heart that most people will benefit from being a passive investor, the truth is that most people do not have enough emotional control or the dedication to be an active investor. There is no shame in admitting that active investing is not for you. And furthermore, make the intelligent decision to be a passive investor. But if you do have the emotional control, dedication and research to be an active investor, then that is a more suitable route for you. But either way you have to know yourself before you know your investing strategy.
The strategies to stay away from! The strategies to stay away from are 1) Day trading, this is because with day trading you are essentially trying to predict the market, which (shockers) don’t work. You could have the smartest people on the planet, and they wouldn’t be able to perfectly predict what the market is going to do in the future. So, with day trading you are essentially gambling, you can’t predict the market, and neither can the graphs day trading gurus tell you to use. Yes, you can get lucky, but it won’t last, so if I were you and I got a little lucky, I would take the money and run.
The second strategy to stay away from is speculation and speculative investing. Again, if Warren Buffet can’t predict the market, then neither can you. Now, obviously you’re allowed to take some speculative investments, but it should not be anywhere over 10% of your portfolio. Speculative investing is allowed if you want to take extreme risks and have some fun, but you should only then invest the money you are okey with losing.
Investing is not a fair game, there are losers and there are winners. And by knowing yourself deeply enough, then you should know your investing path. By being prepared, knowing yourself and taking advantage of your strong side and the market, then you will end up as a winner in the market.
Thank you for reading
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