3 Types of Investors
Investors make investments to generate returns on their capital or that of others, from purchasing stocks at home to multi-billion dollar funds that invest globally.
The most frequently chosen investments include stocks, debt instruments, real estate purchases, commodities, and mutual funds. Your selection will depend on your goals, risk tolerance, and time horizon.
1. Active Investor
An Active Investor is anyone who takes an active approach to investing. They could range from individuals who trade their portfolio of stocks, ETFs, and mutual funds directly or professional fund managers who pick stocks to outperform specific sectors or beat the market overall. Active investors incur higher expenses due to paying research analysts and portfolio managers and commission fees when buying and selling shares.
Active investors benefit more from short-term trading opportunities due to stock price volatility. They can take advantage of market trends or use strategies such as swing trading to capitalize on short-term fluctuations, making the most out of any short-term fluctuations. Active investors may also adapt their portfolios according to changing market conditions – for instance, adjusting investment exposure during 2008’s financial crisis.
Active investors understand that small increases in return on investments over long periods can add to significant wealth accumulation. So, they strive harder at growing their money actively than passive investing, which usually requires less effort and is more accessible for those with limited time or knowledge to understand.
2. Passive Investor
Passive investors focus on long-term investing. A passive investor essentially owns the market through holding index funds that replicate its return over long stretches – such as holding Standard & Poor’s 500 index funds that historically return about 10 percent annually – so that their returns match those of active traders who often struggle to beat it over time.
Passive investors seek to reduce their risks and costs by buying low and selling high, reducing both their risks and costs. They don’t attempt to predict when markets may shift direction – instead focusing on investing in sound, diversified companies with good track records – including stocks like Eastman Kodak, which dropped nearly to $0.0 before filing bankruptcy protection.
Passive investing can be an ideal strategy for people who lack the time or dedication necessary for active investing but still wish to reap some financial benefits. They place their money in an index or mutual or exchange-traded fund that tracks market returns, then invest for long-term gains without paying tax until selling – recommended by legendary investor Warren Buffett himself!
3. Active Passive Investor
An increasing number of individuals are turning to passive investing strategies as part of their investment approach, thanks partly to low-cost target-date funds, exchange-traded funds, and robo-advisors. Passive strategies offer many advantages:
Index funds have lower fees because they don’t require active management. Furthermore, they’re easily visible – meaning you can see which stocks make up the fund – and perform well when markets increase since indexes tend to perform well overall.
Unbeating an index requires accurate market forecasting, which can be challenging. According to one Wharton finance professor, it usually takes at least ten years of market-beating performance before skill can overcome luck in outperforming an index.
The alternative is for most people to rely solely on passive investments for investment returns. While this approach can work, some may find it frustrating and restrictive. Luckily, most people naturally progress through all three investment styles as their skills and portfolio develop; this is especially beneficial for people approaching retirement who may require an active approach to ensure a comfortable future.