Equity investing – or investing in the stock market – is a popular method for growing wealth, with roughly 58% of Americans who earn over $100,000 owning stocks as recently as 2022.1 When people make investment decisions, they often do so with a specific strategy in mind, known as an “equity investment style.” These strategies may be based on risk profile, growth potential, or whether the investor wants to be more “hands-off” or “hands-on” in their approach.
Of course, there’s no one style that’s inherently superior to another – which style you use is likely a function of your investment goals and circumstances. Your investment style may evolve over time and you may find that a combination of investment styles suits your needs.
Whether you’re investing on your own or you use a professional, there are a number of tactics you may deploy in order to meet your financial goals. Let’s look at some of the most prevalent equity investment styles.
Active Vs. Passive Investing
Two contrasting methods for managing investments are active and passive investing. Active refers to taking a hands-on approach to the investing process, acquiring and selling assets in order to outperform a particular benchmark. This often involves investing in an actively-managed fund run by a team of investment professionals who determine the fund’s holdings based on individual stock analysis or according to a stated investment objective. Research and timing are hallmarks of active investing.
Passive investing, by comparison, is a more hands-off strategy that involves a fund manager seeking to match the performance of a certain market index rather than trying to outperform it. Investors can access this strategy by investing in a passively-managed fund that tracks a segment of the market they want exposure to.
As the name suggests, growth investors look for companies whose values are expected to grow at a faster rate than the majority of the market. These are often innovators and companies earlier in their life cycles who funnel earnings into the business to fuel growth. While growth stocks may not pay as much by way of dividends compared to mature stocks, they have the potential for strong future returns.
With the value style, investors seek out holdings that are underpriced relative to their underlying value. The goal is to acquire assets at attractive prices on the assumption that those prices will rise when the market realizes the value of those assets and corrects. This strategy often involves analyzing the business fundamentals of individual companies to identify stocks poised for long-term growth.
Quality investing operates on a simple principle: A quality business will produce consistently strong returns. To determine if a company is considered a quality investment, you may look at key characteristics, such as effective management, credibility, and financial stability. Quality stocks are generally well-run companies built on sound business fundamentals.
The quality style isn’t mutually exclusive with growth and value investing. In fact, both types of securities can exist in a quality portfolio.
Indexing is a popular style of passive investing by which you design your portfolio to mirror a market index. The goal is to have your stocks perform in line with the index, not necessarily to outperform it. While index investing doesn’t offer the same potential for outperformance as active strategies, these portfolios are simpler to maintain and entail fewer fees and transaction costs.
Buy-and Hold Investing
Finally, the buy-and-hold technique looks for long-term growth by investing in stocks while their prices are low to take advantage of their appreciation in value over time. This more passive style entails picking securities with staying power and leaving them in your portfolio for an extended period, possibly decades.
Which Equity Investment Style Fits Your Financial Goal?
When it comes to equity investing styles, the strategy you use will depend on your unique financial goals, risk tolerance, age, and a number of other factors. It’s also important to allow your style(s) to change over time as your overall portfolio objectives evolve.
A financial advisor can work with you to achieve a full picture of your situation and design a balanced portfolio based on strategies that align with your goals. Reach out to a financial advisor today.
1 Dhawan, S. (Aug. 11, 2022) 58% of Americans reported owning stock in April 2022 with an ownership rate of 89% for adults earning $100,000 or more. Financial Express,https://www.financialexpress.com/investing-abroad/featured-stories/58-of-america ns-reported-owning-stock-in-april-2022-with-an-ownership-rate-of-89-for-adults- earning-100000-or-more/2626249/