What Type of Investor Are You?

Published Fri, May 1 2020 at 10:16 PM PT
-
By Obioha Okereke

Before you start investing…

Starting to invest is much easier than it seems and yet, most students aren’t doing it. At first, it can seem daunting…investing requires knowledge, a brokerage account, and the ability to take on risk. Most importantly, it requires money!

Learning how to invest, in my opinion, is one of the greatest skills someone can learn. As a college student, it can seem daunting, confusing, and risky, but with the presence of online banking, and tons of investing apps, it couldn’t be easier to start investing.

Ready to get started?

What type of investor do you want to be?

The first step is to identify what type of investor you’d like to be — do you want to be aggressive? Conservative? Can you afford to take on a lot of risk? How much money do you have to get started with? Would you like for someone else to manage it?

Those are some of the questions you should be asking yourself as you consider investing in the stock market.

It is very easy to make money, and even easier to lose it. Let’s talk through some of the different ways to manage your investments.

What is Passive Investing?

This is where the phrase, “Buy and hold” comes from. The idea of passive investing is to invest in stocks, bonds, and assets like real estate over a long term period (longer than 1-year), and to make money from dividends and long term capital gains.

If you’d like to invest, but don’t want to check the market every day, or even every week, you’re most likely a passive investor. The goal of passive investing is to focus on the long-term, and not try to “beat” or “play” the market. You’re satisfied with average returns and may even prefer that a professional, or robo-advisor, manage your money. In other words, you’re boring!

Jokes aside, most people are passive investors. This is most convenient if you’re busy and don’t have much time to manage your portfolio on a regular basis. Whether you’ve got a full-time job, or you’re a student (hint, hint), passive investing is a smart strategy.

Passive investment strategies include mutual funds, index funds, and ETFs. When compared with other strategies, passive investing comes out ahead.

What is Active Investing?

Active investing is suitable for those of you who aim to generate higher returns than average market returns. In simple terms, active investing is the act of continuously buying, and selling securities. Active investors are constantly monitoring the market and their investments in effort to maximize returns.

This strategy carries more risk than passive investing, and is not suitable for people who are likely to become emotional if a stock they own is decreasing.

Currently, there is a lot of market volatility due to coronavirus, unemployment, and general uncertainty in regards to which direction the economy is heading. Below I will provide examples of how you’d invest with each one of the styles I’ve mentioned above.

Passive vs. Active Investing

As a passive investor, you would be focusing on value — looking at companies like Microsoft, Starbucks, and Berkshire Hathaway, which all observed sharp declines in their stock price when panic hit. Today, all of those stocks are trading at discounts compared to what they were a year ago. As a passive investor, you would be purchasing shares of those companies and hanging on for the next several years, sitting back, collecting your dividends, and watching as the stocks climbed higher.

As an active investor, you’d be looking to maximize your profit, exploiting the current market conditions, and identifying methods to make money. In addition to purchasing undervalued stocks like a passive investor, you would focus on trading off the volatility. You would look at shorting the market, trading leveraged ETFs, purchasing options, and paying close attention to daily price movements.

With active investing, you might not make trades on a daily basis, but in the current climate, you’d likely be making at least one trade a week.

What some people often fail to consider is that you are taxed differently for long-term, and short-term investments. Capital gains from long-term investments are taxed at a lower rate than short-term investments (investments held for less than 12 months). Be mindful of this fact is you start buying and selling financial securities.

Read: Understanding Long-Term vs. Short-Term Capital Gains

Have questions? Send an email to learn@collegemoneyhabits.com or message us on Instagram