How to Determine Your Investment Philosophy
Investment philosophy is how an individual approaches investing. Value investors focus on affordable shares, while growth investors buy fast-growing companies.
April 4, 2022
This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment advisor before making investment decisions.
Investing is the best way to build long-term wealth and strengthen your financial security. But there are many different ways to invest.
Investors may choose to buy-and-hold index funds, using a passive investing strategy. Or they may actively buy and sell stocks on a daily basis, preferring an active strategy.
Other investors may focus on growth stocks, or may prefer value stocks with attractive valuations.
An individual’s approach to investing could be called their investment philosophy. But what does this term really mean, and how do you figure out what your investment philosophy is?
What is an investment philosophy?
An investment philosophy is an individual’s preferences and approach to investing. It’s a set of principles and beliefs that guides investing decisions.
Your investment philosophy should take into account your financial goals, your investment timeline (how long you have before you will need the money), your risk tolerance (how comfortable you are with taking risks), and other factors.
One of the principles of investing is that it is important to understand what type of investor you want to be. If you understand more about yourself and your approach to investing, you can make clearer, more intentional decisions.
Popular investment philosophies
Investment philosophy examples include value investing, growth investing, and socially responsible investing.
Some of the most common investment philosophies are explained below.
Value investing focuses on buying assets that seem undervalued. A value investor will often focus on factors like the price/earnings ratio, which is a measure of the price of the stock compared to the earnings of the company. They will look for stocks with a low price/earnings ratio, because they view that as a sign that the stock is undervalued.
Benjamin Graham, an American economist, is considered the founder of value investing. But perhaps the most famous value investor is Warren Buffet, a legendary investor who studied under Graham, and has built a net worth of well over $100 billion by following value investing principles.
Growth investing favors rapidly growing companies. Earnings or profits are often less important for growth investors — growth, and growing market share, is the most important. Technology companies are often a favorite of growth investors.
Thomas Rowe Price, Jr is known as the father of growth investing. In 1950, he started one of the first growth-focused investment funds.
Passive investing focuses on simplicity, diversification, and minimizing fees. Passive investors prefer to buy index funds rather than individual stocks. Index funds are a quick and easy way to buy into hundreds of stocks all at once. Passive investing is a “set it and forget it” approach, which is well suited for people who don’t want to actively think about investing much.
John C. Bogle is considered the father of passive investing. He founded the Vanguard Group, which was the first broker to bring low-cost, passive index fund investing to the public.
Active trading is the opposite of passive investing. Active traders will buy and sell stocks frequently, attempt to time swings in the market, and will attempt to earn higher returns than they could with passive strategies.
There’s no clear “founder” of active trading, but it’s a strategy that most hedge funds and investment managers use.
Contrarian investing involves “going against the flow”. If investors are buying US stocks (driving up their values), a contrarian investor may buy international stocks (which will likely be cheaper). If investors are buying cryptocurrency, a contrarian investor may buy gold.
John Paulson is perhaps the most famous contrarian investor, due to his incredibly successful bet against the U.S. housing market prior to the 2007 housing market collapse.
Momentum investing is a form of active trading that focuses on short- to medium-term bets. Momentum investors also commonly use leverage, which is a way to borrow money to increase the size of the investment (and increase the risk/potential rewards).
George Soros is one of the most famous momentum investors, who often makes large, highly-leveraged short-term bets in the market.
Socially responsible investing
Socially responsible investing, also called ethical investing or ESG investing, involves investing in companies that align with an investor’s values. That could mean avoiding investing in tobacco or alcohol companies, or it could mean focusing investments on businesses with female CEOs.
This type of investing dates back to ancient times. Several ancient religions have included ethical guidance in their teachings relating to investing, business, and lending money.
Analytic investing focuses on analyzing charts, statistics, and other data to make informed investment decisions. Fundamental analysis focuses on the company’s financial details, while technical analysis focuses more on reading stock charts and identifying patterns.
Charles Dow is considered the father of technical analysis, thanks to his work on studying market movements.
How to determine your investment philosophy
Your investment philosophy will affect your investment planning, and your day-to-day decision making when it comes to your finances.
To find the philosophy that aligns most with your goals and personality, here are some questions to ask yourself:
How involved do you want to be? Do you want to be actively involved in your investing strategy, or would you rather set it up once and set things on autopilot?
What are your investment goals? Do you want to make as much money as possible (and are willing to take on risk)? Or do you want to preserve the money you have, minimize risk, and ideally grow your wealth slowly?
Which of the common investment philosophies align best with your thinking on investing?
Keep in mind that you don’t have to be 100% aligned with any one strategy or philosophy.
For example, an investor may choose to be a passive index fund investor with 90% of their assets, but commit to actively trading with 10% of their money. Or an investor may focus on growth stocks, but also hold some value stocks and other types of stocks in their portfolio.
No matter what strategy you choose, remember the principles of investing:
It’s important to diversify your investments
Minimizing investment fees is important to long-term success with investing
Minimizing investment taxes is also important
Timing the market is difficult. Time in the market is more important
It’s vital to have a plan — and to stick to it
Ready to learn more? Read our complete beginner’s guide to investing.
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