Investment styles are categorized into passive or active investing rather than categorized by an investor’s 2 sensible emotional investing choices. These two styles reference the amount of work commitment involved for an investor. A passive style doesn’t require much time commitment whereas an active style does. This isn’t always accurate, and there is a bigger factor that investors should consider when deciding upon appropriate investment styles. Different styles of investing should focus more upon the investor’s emotional investing interest than the actual activity involved. I prefer to tag the two different styles of investing as “attached” or “detached” investing.
Passive investing which is the concept of investing primarily using indexes that mirror the market benchmarks, such as the S&P 500, is a reflection of investors that would like to capture the long term average historical returns of the market. It’s a simple style of emotional investing that doesn’t require much investment time commitment for the investor, and there is enough historical data to show investors what could most likely occur over long periods of time reducing the emotional worry of possible disruptive events. This type of investing, in my view, is a detached style of investing.
Nothing is conceptually perfect within the investment world, and it shouldn’t be overlooked that passive index emotional investing is usually a portfolio of companies that make up the index which are chosen by behind door committees of the companies that created the indexes. These committees do the leg work, so in an obscure sort of way the index is an active type portfolio where the work is done by others much like a mutual fund, yet there is enough historical information to give investors a general idea of what the long term performance averages could pan out to.
The attached investor on the other hand wants to take an interest within corporations or businesses they believe in, want to support, or hope to capitalize on. The emotional swings of these types of attached believers will be much greater, since as with running a business, a business owner must stay involved or aware of the dealings and progress of the business and it’s competitiveness or dominance in commerce in order to protect their monies. Attached investors tend to enjoy controlling their investment choices, and they ultimately like to feel hands on.
With this responsibility comes the emotional investing swings, and internal questioning that the investment or market will toll on investors. The stock market is a master at showing people their weaknesses and patience, and playing upon a person’s mental capacity. Even if you are a long term investor the market will test you periodically. There are no guarantees, and even the greatest of investments can crumble, which will always be in the background. The bigger of a hands on investor that you become the greater of emotional discipline and experience you will need in order to not submarine yourself.
For the attached investor common styles of emotional investing would be investing within specific stocks, mutual funds, trading, or capitalizing on market swings. For the detached investor their strategies would revolve around index investing or strategy based screens that rebalance or adjust their positions annually based purely on the parameters inputted into their screens. The detached investor’s view should generally always be long term whereas the attached investor’s time frame will vary, since the attached investor may only be looking for market moves or potential under or over valuation as a reason to adjust their investments.
Using 2 Sensible Emotional Investing Choices
Determining what type of investments as an investor you want to work with should be more determined by your emotional commitment and capabilities as an investor rather than the amount of work you want to put in as an investor. As an example, investing directly in a stock of a corporation is considered an active style of investing, but it may only require annual check ups to determine if the investment is still on course which may not be much of a greater activity than that of a passive type investment’s annual re-balancing. Attached and detached style classifications of investing identify emotional commitments to investing that every investor should focus on.
For new investors check out 7 Skiffful Steps for Investing Beginners.