The world is full of investment experts, ideas and tips. Every day there’s a new idea or strategy that can make you money. But despite the information overload, there are generally two broad types of investors – the enterprising investor or the defensive investor. Deciding upon whether you are enterprising, defensive or a combination of both will form a strong basis for your investment decisions.
As investors, it’s important to distinguish between investment and speculation. Investing is the act of postponing the immediate consumption of resources with the hope of deriving future benefits. The key idea is one of current sacrifice and future benefit, which means that for an investment to make sense, it has to have an adequate return associated with a given level of risk.
Speculation on the other hand, does not promise the initial investment nor any expected returns. It is mostly a gamble on the future price change of an asset, as opposed to the real value of the asset. For this reason, speculation tends to be short term and correlation between the level of risk and return can be highly uncertain.
Investing is ultimately an activity whereby the investor accepts a certain level of risk (of losing initial capital) for a given level of expected return. High risk investments therefore must demand a high level of return. The question of whether you should be an enterprising investor or a defensive investor is dependent on the level of risk that you can comfortably take on and the amount of time that you have to evaluate investment decisions.
The defensive investor is primarily concerned with limiting downside risk. They want to spend little time managing their assets and are happy with moderate returns. As such, this group of investors are not concerned about picking the right stock, but are concerned about getting the optimal asset allocation, building a passively diversified portfolio and then sitting back and let the portfolio do the work. This approach will allow defensive investors to spend time on other activities and hobbies while still ensuring an adequate level of return.
In order to control downside risk, defensive investors must manage their exposure by diversifying and allocating their portfolio correctly between various asset classes. They generally choose to invest in ‘safer’ asset classes such as bonds and blue chip stocks and stay away from actively managing and trying to identify ‘opportunities’. Recently, software technology has empowered this group of investors by optimally allocating their capital based on the individual investor’s risk tolerance. Automated online investment platforms (robo-advisers) can enable the defensive investor to obtain a perfectly diversified portfolio at a very low costs, making this style of investing as easy as it has ever been.
Whats the approach and style of the enterprising investor? The enterprising investor firstly have high expectations and demands higher future returns. This means that they must be willing to spend time doing analysis and research. These investors are concerned both with the asset allocation and the security selection aspects of their investment portfolio. Enterprising investors constantly monitor the value of their investment portfolio and constantly researches the market to look for opportunities. Most likely, this group of investors enjoy the ‘game’ of investing, has a longer time horizon to invest and also strive to achieve returns greater than the market (beating market returns).
The enterprising investor generally succeeds by adopting a style whereby they avoid ‘herd mentality’ and identifying undervalued securities that they can act upon. By not following the crowd, the enterprising investor must have confidence and trust in their own judgments and evaluations. They don’t fall for populist ideas and tactics knowing that they’re likely to be over-valued and over-hyped. Instead opportunities lie where everyone is not looking, enterprising investors look to capitalise on the gap between price and value.
Be fearful when others are greedy and greedy when others are fearful
~ Warren Buffett
Deciding upon which style of investing suits you should form the basis for your strategies. But one thing is for sure, it is better to invest than to not invest, since the value of your money will be eroded by inflation over time. However, it is also useful to note that you can pick a hybrid approach, allocating a portion of your money to a passive portfolio and also actively managing another amount. The choice is up to you to know whether you have the time, skill and risk appetite.
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