Understanding what type of investor you are is crucial to working out the type of investment that will help you reach your goals. Outside forces, including inflation, market fluctuation, and the overall economic environment can also dictate investment styles.
There are three types of investors:
- Passive/low-maintenance investor
- Active Investor
- Hands-off investor/automatic investor
Passive / Low-Maintenance Investor
A passive or low-maintenance investor is one who lacks the time or desire to monitor her investments. These types of investors are unemotional about the entire investment process and tend to maintain portfolios consisting of multiple ways to spread risk.
While these investors maintain full control of their investments, they also strive to match or beat the broad market’s performance. Passive investors are fond of passive mutual funds, passive ETFs, and blue-chip stocks. While they are proactive in selecting the type of investments they want, such investors tend to be less active in balancing and maintaining their portfolios afterwards. Their investment philosophy tends to be long-term buy and hold.
Active investors are hands-on in all aspects of investments, from selecting investment plays to adjusting portfolios depending on performance. These types of investors spend hours each day watching over their investments.
An active investor is more commonly described as a ‘trader’, with an account in one or more online brokerages. Such investors follow the market on a daily basis, even if they don’t execute dozens of trades. The hands-on approach means they are emotionally invested to keep checking their portfolios frequently.
Active investors tend to own select companies and are always ready to invest in a diversified portfolio. While maintaining full control of their investments, such investors are always striving to beat the market.
Hands-Off / Automatic Investor
Hands-off investors, just like passive investors, don’t have the time to watch their investments. In addition, they are not involved in the selection of investments, as they don’t believe in their ability to outperform professionals.
Automatic investors simply outsource the investment process to a team of professionals and task them with the responsibility of finding them exciting and lucrative investment opportunities. Mutual funds, ETFs, savings accounts, and managed investment accounts for a huge chunk of hands-off investors investment portfolios.
While such investors might hold dividend stocks in a bid to earn some income, most of them tend to stay clear of individual stocks that are always the subject of immense volatility. For this reason, most of them are usually focused on investment plans rather than investing in many different places.
Regardless of the type of investor you are, it is important to have a basic understanding of how capital is invested, as well as the risks and costs that come with them.