Putting Some Style on Your Assets
Deciding on an investment style before going all in on your journey will be an integral driver of what assets you acquire. It’s the style of play that leads us in the direction that is true to our goals and makeup. Just as successful athletes, entertainers, and teachers have their specific characteristics that make them great in their fields, a successful investor also will need to develop their own effective traits.
A substantial component of successful investing is knowing what type of investor you are. Can you handle the constant swings in market prices? Do you have the patience to stick with a long-term holding period investment? Maybe your style will be a growth investor, value investor, dividend income seeker, or pure diversified investor.
Growth investing is an investment strategy that concentrates on increasing the value of an investor’s money in a short period of time. This method is focused around investing in assets that show great potential for rapid growth and returns. In the stock market, common traits shown by “growth” companies are above average revenue, earnings, cash flow growth in comparison to its peers, or reinvesting profits towards innovation instead of shelling out generous dividends.
There are numerous ways to seek out growth investments. Mutual funds consisting of emerging markets or innovative new businesses, newly issued Initial Public Offering (IPO) stocks, a real estate market approaching a sales boost, or any investment that has the potential to create a new market which benefits the consumer base as a whole. There’s no right or wrong way to evaluate growth opportunities, and at the same time there isn’t a guaranteed method to continuous successful selections. Looking for the criteria that may constitute a potential growth investment is the easy part. Producing the maximum return on investment is the challenge.
Value investing is an investment strategy based on investing in assets that maintain long-term steady progress, and are acquired at a price lower than its worth. The idea is to seek undervalued assets that carry the potential for sustained success. When the market as a whole is pessimistic and experiences a sell off, value investors are right there to scoop up the investment opportunities. The period of holding a value asset is strictly long-term, no less than one year. It’s difficult to see an investment’s true value if it becomes released in a short period of time.
The value is in the consistency. In the stock market, companies that continue to produce steady revenue, income, and cash flow see consistent growth. In real estate, markets that maintain excellent consumer convenience, strong schools, and a clean environment normally benefit from increased property values over the years. A target period for undervalued opportunities may be the fourth quarter of the year, as investors often sell assets for tax benefits. A value investor sticks with their position regardless of how the overall economy is behaving.
Dividend / Income Seeker
In the stock market field, any company that continuously pays dividends is called a dividend stock. The beauty of dividend stocks is no matter the current ups, downs, rain, snow, or sleet, that dividend payment will reach your account when it’s due. What is important in investing for dividends is the sustainability of its future payouts. The future earnings growth and profitability will allow a company to maintain strong increases in yearly payments. When it comes to dividend stocks, the minimum holding period should be one year. It’s better to collect a full year of dividends and long-term capital gains versus taking on a higher short-term capital gains tax.
Real estate works slightly different from stocks as income earned from investing is less guaranteed. Owning rental properties are created to generate consistent monthly income. Unlike dividends where the company sets the amount to issue, the property owner sets the amount of rent to collect to establish the desired margin of profit. With a great location, well maintained unit, and reasonable price, a property will always rent. However, there is no guarantee on reliable tenants. Picking the right tenants is just as important as acquiring the home at an undervalued price.
Diversified investors seek to build a portfolio of different asset types to create a balance of investments. The idea behind diversification is to have assets from different industries to reduce the risk of one particular industry falling and hurting the overall portfolio. There are investment portfolios that have a mixture of all three styles above. Buying into a value asset while taking on positions with a growth and dividend opportunity allows for steady value, plus consistent dividends to soften the tough times. Cyclical products will experience frequent ups and downs throughout the market, so having other assets that remain steady helps diversified investors stay afloat.
Building a diversified portfolio can be done simply by opening an Individual Retirement Account (IRA), buying into a mutual fund, and having a rental property, or simply acquiring a position in the S&P 500 Index. With a mixture of assets, periodic adjusting is recommended to remain balanced. When it comes down to investing, the single most important result is to increase the asset’s value. Whether this occurs with short-term growth and dividend income or long-term steady capital appreciation, the gains are still realized.
The Risk, Your Tolerance
A style can be adopted and mastered over time, but your risk tolerance is something that has always been within you. Investing comes with a lot of risks, so be aware of your tolerance. For beginners, going for a home run with a $10,000 entry price may not suit your nerves right away. A seasoned investor may feel more comfortable doing that since they have experienced a similar scenario. Who wants to put their money into an investment to stress every day about it? That’s no way to live. Nor is it smart investing.
Yes, it is possible to lose your entire principal amount in an investment. However, the leading contributor to this result is the lack of due diligence put into understanding the asset. If you don’t perform the proper research before acquiring any asset, then it definitely will open the door to potential drastic losses.
Markets move every single day, and periodically have major swings in prices and valuations. Are you able to handle the chaotic surges and blows your portfolio will take over the years? No investment journey is a cake walk. And the majority of investors experience anxiety from the constant movements an asset will endure. If you are alike and cannot control your emotions when numbers dip dramatically, then either you need to invest in steady assets or work on your emotional temperament.
Although risk tolerance is already within your makeup, it can be improved with experience. Mutual funds and exchange traded funds (ETF) are less risky investment options than individual stocks or real estate because they embody a diverse collection of industries. Buying into a mutual fund or ETF will give you a seat in the stock market and help to minimize your anxiety from the risk. Once you feel comfortable with the results you are receiving, then the option to take on more risky investments can be visited.
It’s not about risk versus reward. It’s about choosing the right investment for your emotional tolerance. The only focus should center on increasing the value of the asset. Gaining small amounts of profit is always better than losing money with high risk high reward decisions. Understanding your investment style, then having a grasp of your risk tolerance will steer you towards the best path for you.