Investing is both easy and tough based on what type of investor you are. Understanding the different types of investing might be crucial in helping you check if your expectation matches the risk involved in investing in a particular asset category. Each type has its own merits and demerits and you need to map your expectations with the right type, based on whichever is more beneficial to achieve your financial goals. And more importantly, the type of investing has a direct relation to your personality. Each individual has a different personality and as an investor, this personality should be in sync with your investment style to utilise the merits of the investment type completely. When the personality doesn't match the style, you will doubt your investment decisions and ultimately find it difficult to stick to the investment plan. So it's imperative to know the different types of investing and associate ourselves to the type which reflect our own personality.
Passive-Conservative Investing Passive investing is a style of investing where you either invest in fixed income asset classes or simply let others manage your portfolio allocations. Investors who are highly risk averse, conservative and who feel the need to conserve capital, are better suited to the fixed income category. Investing only in fixed income assets like fixed deposits, PPF, VPF, GOI Savings Bonds etc, helps you to be in peace with your personality of no risk. When you start investing in asset classes which are market linked and if you feel uncomfortable or worried about negative/red numbers popping up on the screen, it starts affecting your personal life. Even though you might be aware that these losses are temporary, you feel highly anxious and it disturbs your everyday activities. If this is the case, it is better to invest in fixed income assets that give you peace of mind.
Passive-Aggressive Investing Investors who are willing to take minor risks in order to generate higher returns, but are unable to take decisions on their own are considered Passive-Aggressive investors. They are inclined to invest in mutual funds, NPS etc., which are market linked. Investing in the right equity and debt assets require significant understanding of how the equity markets work fundamentally and technically. Though it is possible to understand the nuances of equity markets, it takes time and effort to study the prospects of the companies in your watch-list. For investors lacking time due to other commitments or rather, just lazy to put in the effort, they can let the fund managers do it for them. Also, if you are a person who is hasty and worry about the everyday movement of stocks (Volatility), you are bound to make wrong decisions in buying or selling stocks. Even though you have a defined risk, the anxious nature of your personality will not be in sync with what the equity market offers in terms of volatility. By investing in mutual funds, the volatility of direct equity investments are smoothed by the larger portfolio of mutual funds, thereby matching your personality to a riskier asset that can generate your expected returns. By contributing to a Systematic Investment Plan(SIP), the frequent decision making can be avoided to let your investment plan drive on auto pilot. However, there are multiple categories within the mutual fund and each has varied returns and volatility. If a fund's volatile nature makes you worry about your investment decisions, then you are not in sync with the fund type and might want to switch over to a different fund which is less volatile.
Active Investing Active investing is a type where you build your own portfolio of stocks. Active investing is suitable for people who like to micro-manage and control aspects of their life in detail. To micro-manage, you obviously need to have in depth knowledge of where you put your money in. And to gain the knowledge, time and effort needs to be spent on analysing each stock that you wish to add to your own portfolio. By active investing, you have more control of what is in your portfolio. For example, a mutual fund might go heavy weight on a particular sector which you are not comfortable with. But if you were already invested in that mutual fund, there is nothing much you could do other than staying invested. But by managing your own portfolio of stocks, you can churn it conveniently as required. But, irrespective of how knowledgeable we are as an investor, we will not be able to match the money power of mutual funds and their inside knowledge of the stocks. Hence the risk is many times higher than investing via mutual funds due to lack of timely information. According to Warren Buffett, you are not suitable for stock market investing if you cannot mentally handle a 50% loss on capital. Of course, you don't have to wait till you lose 50%. If you can't handle a 10% loss on capital and if such a loss is giving you sleepless nights, you need to switch over to mutual funds. Also, there are a certain type of direct equity investors who follow a buy and forget strategy. Stocks lay in their portfolio for years without evaluation. They cannot be considered as active investing since they are not getting the advantage of managing the portfolio aggressively. Rather they are just passively investing with additional demerits of more risk.
Speculative Investing Speculators are basically traders who use their discretion to enter and exit stocks based on a system. Unlike the other types, speculative investing thrives on volatility of the stock market. Volatility provides opportunity for traders to ride a momentum and profit out of it. Hence this type of investing is totally different from passive and active types. Stock trading requires a high level of technical and mental skills. If you are a quick decision maker and are able to change your views based on the market trend, you are suitable for stock trading. Traders require high level of conviction and focus to succeed. Mental skill is the most ignored, yet the most important skill for a trader to make them immune to past trading outcomes, be it a profit or a loss. It helps to take a trade without the past trade's bias affecting the new trade. It is not a surprise that most traders are unsuccessful despite being knowledgeable, because of the lack of psychological control over their trades. An investor lacking discipline in their personality would find it difficult to make consistent profitable trades. Risk management should be systematically followed and the trader should stick to the trading plan and be able to book losses as it comes. These traits are generally against the common psychology of humans, where our mind is wired to protect us from losses, thereby making us take wrong decisions. But if you feel these traits form your basic personality, you are suited to this type of speculative investing instead of passive/active investing.
Despite the different types of investing, an investor can have some exposure to all these types, to a degree such that you are not deviating from your personality at large. When your exposure to the different types are not in sync with your personality, you are bound to make bad decisions on your asset allocation and money management, thereby significantly affecting your financial goals.
For example, if your personality matches that of passive investing, where you feel anxious about losses, yet you have a larger exposure to direct equity, a loss will be too much to bear. In most cases, the human mind which is averse to seeing losses, would force you into taking a decision of liquidating your fixed income asset and add onto the loss making equity investment to reduce the purchasing cost (Averaging Down) and to stick onto a hope that the stock would recover from the current level. This not only locks your money into a loss making asset, but also liquidated an asset that was giving decent returns in addition to capital preservation. This decision will impact your future investment plans too.
But when your personality is in sync with a loss making equity investment, you would not find it difficult to book your loss, if the company's performance is not upto the mark. This helps in moving onto the next opportunity while you keep your investment plan undisturbed. So know your personality and understand whether the type of investing is in sync with your personality, before planning your financial goals. This is crucial in decision making.
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