Whether you’re a new or seasoned investor, determining your investment style and how it aligns with your financial plan is a crucial first step. Clearly identifying your investment philosophy not only helps you make better decisions with your money but empowers you to set and achieve financial goals efficiently and effectively. In this article, you’ll learn how to determine your own investment style and explore some considerations in choosing the best way to invest in your financial future.
What Is an Investment Style?
Investment styles are the methods and principles you follow – or those followed by your financial planner – in determining which investments to choose for your portfolio. Your investment style is based on three main elements: risk tolerance (either aggressive, moderate, or conservative), the choice of growth or value stocks, and the level of market capitalization.
Your risk tolerance is just what it sounds like: how much financial risk you’re willing to take on with the investments that you choose. This is an entirely personal choice, and one that you can change at any time.
Your investment style will also be informed by your choice of stocks. A growth stock is one that has the potential to perform exceedingly well and has demonstrated better-than-average earnings. It is generally higher priced but has the potential for higher levels of profit growth. A value stock is one that isn’t seen as lucrative as others by the market – perhaps those of new companies – which makes them lower priced. However, value stocks are seen as trading below their potential, so they will ultimately offer a better return.
Market capitalization – or market cap – is the total dollar value of a company’s market shares, which are categorized as small-cap (between $300 million and $2 billion), mid-cap between $2 billion and $10 billion), or large-cap (between $10 billion and $200 billion).
Aggressive risk-based investments include those with a high-growth potential – like those focused on global securities or a high-growth region of the world. They have more flexibility, but they’re also more volatile, hence the aggressive risk.
Moderate risk-based investments include those with steady payouts from large-cap, established companies or value stocks. A moderate-risk investor may, for example, choose a 50/50 structure, investing half of their investment portfolio in a growth fund and half in securities and bonds with much lower risks.
Conservative risk-based investments are usually made based on income and fixed-income investments. This style of investment aims to preserve wealth rather than focus on growth, turning to low-risk securities with little volatility like money market funds and bonds.
How Do I Know What Style is Right for Me?
Your investment style doesn’t necessarily depend on the stage of your career or age – it really depends on your personal goals and financial roadmap. The best first step to determining your investment style is to meet with a financial advisor. Dylan Asham, Financial Advisor at Westoba Financial Solutions, explains that your financial advisor will help you understand the options available to you that fit your risk tolerance. “They can show you how those investment options have performed in both good and bad times in the past to determine which may be the best fit for you,” he said.
That said, there are some questions you can ask yourself now to help define the style of investment that suits you best.
1. What outcome do you want from your investments?
A) I don’t want to lose any money, even if that means no income on my investments
B) I can handle a little bit of up and down in my investment profit
C) I’m set on maximum growth and can tolerate volatility in the process
2. What level of gain or loss on an investment would you be comfortable with after one year?
3. If there was an abrupt drop in stock market prices and you lost a third of your investment value, what would you do?
A) Withdraw your investment immediately
B) Withdraw most of it, but keep some in the market
C) Wait it out
4. Are you comfortable with your investment dropping in value as the market fluctuates?
A) Not at all
B) For a short period of time
C) Yes, it’s expected
5. If you lost your source of income, how long could you manage your monthly expenses on your savings?
A) Less than a month
B) Three months
C) More than six months
If you answered mostly [A] to these questions, then your investment style is likely conservative, and you might benefit from a portfolio that includes low-risk securities. If you answered mostly [B], then you can likely tolerate a moderate level of risk and could benefit from talking to your financial advisor about a 50/50 or 60/40 mix of stocks and bonds. If you answered mostly [C] to these questions, then you can likely handle a more aggressive investment style and could benefit from talking to your financial advisor about small-cap investing or aggressive growth funds.
Where Should I Begin?
Even if you’re not ready to enter the stock market and building an investment portfolio feels daunting, there are steps you can take no matter where you are in your financial journey. If you’re just starting your career and don’t have a lot of disposable income, for example, it’s still hugely beneficial to begin putting money aside every month to begin building an investment portfolio – even if it’s only a few dollars. “You will be surprised how even $25 every two weeks will build up over time,” Dylan explains. “When your available cash flow grows, you can then consider adjusting your regular savings.”
You should also explore and take advantage of your workplace’s savings plan options. “The company may provide matching contributions to help you grow your savings,” explains Scott.
How Can Westoba Help?
You’ve done an initial assessment of your investment style and thought about some of the ways in which you can start investing – now what? The next step is to get in touch with our Financial Planning Team to speak one-on-one with an advisor to help you create an investment strategy and build your investment portfolio.
There is a variety of products and services at Westoba that will help you in your investment journey. If you’d prefer to begin investing at your local branch, there are variable account and GIC options available. We also have high-interest savings options through the Maxa Financial Division.
Or, if you’re more inclined to explore your options online, our Qtrade Guided Portfolios investing service is a simple and convenient way to build an investment portfolio that suits your style and goals. Qtrade Guided Portfolios is automated so that you don’t have to worry about making investment decisions and is continually re-balanced and monitored by our expert team so that you can take comfort in knowing that your portfolio is being professionally managed.
You can also take advantage of Qtrade Direct Investing, the award-winning platform that allows you to buy and sell stocks, bonds, ETFs, and mutual funds online. With low trading fees, online learning resources, and friendly customer service, Qtrade makes building and managing your investment portfolio simple and straightforward.
Whether you’re ready to dive into building your portfolio or have a few more questions before you begin investing, we’re here to help. Get in touch with us today!