“Risk comes from not knowing what you’re doing.” – Warren Buffett

When you invest money, not just simply saving, there can not be a “one-size-fits-all” approach. The investment strategy or style that works for you, may not be what works best for your spouse, parent or best friend.

Asking the right questions can help you determine which path to take when pursuing investment goals. For example, are you a risk-taker or risk-averse? Are you looking for long term growth or immediate gains?

This kind of self reflection can help you to match your needs to a specific investing style. With that in mind, here are six ways to invest, depending on your focus.

1. Active Investment Approach

This style works for you if you have a higher risk tolerance and keep a close eye on market trends and movements. Active investing is generally used by investors who aren’t as concerned with the long-term horizon as they are with the present. With this strategy, you select specific stocks and use market timing to try to outperform the market in an effort to seek short-term profits.One important point here is not to chase returns based on recency bias, which states that investments recent performance will stay same forever.

2. Passive Investment Approach

If you are more risk-averse and don’t want to stare at the market screens on your computer all day, a passive investing style may be more up your alley. Passive investors are those who invest their money with a long-term time horizon. Instead of trying to time the market like an active investor, passive investors create portfolios that track a market-weighted index or portfolio.

3. Growth Style

The growth style of investing is one that focuses on stocks of companies whose earnings are growing faster than most other stocks and are expected to continue to grow. These stocks are oftentimes referred to as being overvalued and have a high price to earnings ratio.

4. Value Style

Unlike growth investors who look for overvalued securities, value investors look for those stocks that are undervalued. Value investors expect that these securities will rise and seek to buy them before they do. This investing style is favourite of  hedge fund manager Warren Buffet who argues the merits of purchasing stocks that sell for less than their intrinsic value based on the premise that they’ll deliver consistent returns in the future.

5. Indexing

Another popular form of passive investing is indexing. With this style of investing, an investor creates a portfolio that mirrors the companies of a particular stock index like NSE or BSE. The portfolio generally will perform in-line with the index. This kind of investing is good for people that are more risk-averse because of the diversification of the index. Indexing can be accomplished by investing in index mutual funds or exchange-traded funds, which track the performance of a benchmark index.

6. Diversification

There are two kinds of risk that every investor must be concerned about: systematic risk and unsystematic risk. Systematic risk is a market risk that cannot be diversified away. But unsystematic risk, or the risk that comes from investing in one particular company or sector, can be diversified away. For example, if you were to invest only in infrastructure companies, you would have a high level of risk due to owning stocks in only one sector. Diversifying your portfolio by adding in or replacing some of the infrastructure companies with technologies companies, your risk level would be reduced.

Which is the best style to choose from?

The one that works best for you ultimately depends on your risk tolerance, time horizon for investing, age and investment goals. Remember that your investing style also not remain save for ever. As you grow older and your investment objectives change, so may your preferred investment approach.

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By Sonika Rastogi

PG in IT, Sonika has total experience of 12 years. She has worked in the fields of Financial Planning, Investment Advisory, Experiential Learning and Overseas Education. Sonika’s strength lies in Research, Operations and Education.

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