Picking up where I left off in yesterdays post ………..

Picking a Style

As a general rule the generic investment styles represent a balance between risk and return.  Your objective should include both return and risk goals which are used to map to the most appropriate style ( or mix of styles).  A description of the four most common styles:

1. Growth – Select investments that are about to break out, that is become in high demand due to rosy prospects.  Usually such investments are on the edge of success and failure and so typically this is higher risk but leads to higher returns.
2. Income – The fluctation in the actual value of the investment is not as important here.  The optimum is low volatility, ( i.e.,  a stable price) as the real return is in the regular income payments, optimally rising with time.  These are normally low to medium risk    and low to medium return (but steady).
3. Value – The objecctive is to purchase an investment for less than it is worth (i.e., good value).  Over time the value will be recognized, the invesment will be worth more. Assuming the process to identify value opportunities is effective the risk is low and the return potential is high.
4. Market Timing – Personally I view this approach as very akin to gambling.  There is great risk and great opportunity for return.  An extreme example of this style is day trading.  That is buying and selling the same investment during the course of a day, closing out your holdings at the end of each day being left with the profit (or loss as the case may be).

The example investment objective in yesterday’s post (e.g., a net annual return of 15% averaged over 5 years with losses in a single year never exceeding 5%.) probably best aligns with value investing although including some income investing in the mix would fit.

Next

In tommorows post I will pick up the thread with the approach to  determining what to purchse (i.e.,the investment itself) , both type and specifics within type.