Personal Investor: Manage your portfolio with style
We’re told to diversify asset classes, sectors and geographic regions but we rarely hear about the importance of mixing investment styles.
One of the most basic style contrasts is passive versus active. There’s not much style to passive management; basic exchange traded funds (ETFs) track an index and hang on for the ride.
But active investing has several styles. The most common is value, or bottom-up, investing. Billionaire Warren Buffett is the poster boy for value investing. His methodology seeks to fund the true value of a stock through earnings and dividends. If a stock is trading below his determined true value, he buys it and waits for the market to fully appreciate it. If a stock is trading above his determined value, he sells it.
The trick, of course, is determining the outlook for future earnings – and that’s why Buffett is Buffett.
The opposite of bottom-up investing is top-down. Investors start by assessing the health of the economy and broader markets, specific sectors, and eventually the best stock in the sector.
Another popular style is growth investing. Some earnings might not impress a value investor but a growth investor speculates that the company or sector has great earnings potential. Technology has traditionally been considered a growth sector because earnings tend to take a while to generate but rise rapidly.
Other styles include technical investing, where past price movements chart a stock’s future course and sector rotation, where investors move in and out of entire sectors.
Some money managers practice a market neutral strategy where specific returns are targeted and risk is assumed accordingly.
There are too many investment styles to count and some money managers will mix and match parts of investment styles. But as any hipster will tell you – style comes at a cost. Be sure you understand the fee structures before you step out.