In the universe of investing, there are five major investment styles that experienced investors use to define their investing. Choosing the right investing style that suits you can be a major factor that determines whether you would become a successful investor. However, before you wonder off too far, let’s start by first learning about the five investment styles that everyone ought to know about in investing in Singapore.
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Value Investment style
Yes, value investing. How can we talk about investing without talking about the most acclaimed investment style? Value investing is a fairly simple concept to understand. But it is often hard to execute as an investor.
Value investing focuses on investing in decent companies at low prices. After which, the stocks are held in your portfolio for 2-5 years before selling it at a profit. This is because value companies are often overlooked by the market. As such, it takes a few years before the market (i.e. other investors) start to truly appreciate the earning capacity or assets of the company.
The common measures that are used to determine value companies are price-to-earnings, price-to-book, price-to-sales and dividend yield. To find value plays, one has to screen the market for low PE, PB, PS or high dividend yield stocks as a first step to uncovering one.
The most famous value investor is Benjamin Graham, who introduced the idea of value investing to the world and his protégé Warren Buffett.
Growth Investment style
If value investing is one end of the spectrum, then growth investing is the opposite end. Unlike value investing which looks at the current valuation of the company, growth investing looks at the future valuation of the company.
Growth investors are more concerned whether the companies are able to continue growing to attain a much larger size. These companies are usually in industries where it is still in the early stage. Growth investing involves looking out for companies that are able to grow at an above average rate, compared to its peers or other industries. Growth investors typically look for investment returns in the form of capital gains.
Peter Lynch is the most famous growth investor. He coined the price-earnings-to-growth ratio, which values companies based on its current earnings and growth rate.
Index/Passive Investment style
Rather than spending your time trying to beat the market, why not just buy the market? That’s exactly what index investing is trying to achieve. Instead of investing in individual stocks or a portfolio of stocks for above average performance, why not just invest in the index and generate the same returns as the index?
The advantage of index investing is the fact that it is a passive form of investing. You don’t have to decide which stock to put in your portfolio or review your portfolio regularly. All you have to do is to review it every six months or a year.
One of the biggest supporter for index investing is Warren Buffett. Warren Buffett believes that if you are looking for a simple plan to retirement, then index investing is the style for you. He recently beat a hedge fund manager in his ten-year bet that his S&P 500 fund would beat the average of any five hedge funds in the world.
Dividend Investment style
Dividend investing is the art of investing in companies that pay high dividend or companies that are growing their dividends at breakneck pace. They are known as high yield dividend investing and high dividend growth rate investing respectively.
High yield dividend investing involves finding large cash cows that are now slow-growing companies. Because of its sheer size and dominance in the industry, there is little they can do with the obscene amount of cash flow they are making. The cash is usually distributed as dividends to its shareholders.
High dividend growth rate investing is different. Instead of investing in existing cash cows, this style invests in companies with fast growing dividend. Investors usually do not mind the current lower-than-average dividends.
Sector Investment style
Instead of looking at individual stocks, sector investing takes a ‘big picture’ approach. Sector investing involves investing in specific sectors of the economy based on the outlook of the sector in the general economy. The stock market is often divided into 10 major sectors, which represent key areas of the economy.
For example, the Fed’s interest rate hike cycle in 2018 will be a boon for the financial sector. The recovering property market in Singapore is also a boon for the property sector. Based on these general outlook, investors adopting the sector investing style will allocate a larger portion of their portfolio to these two sectors.
Ultimately you need to know what you need based on your age, and if you are in your 40s, you could start planning for retirement.
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