When it comes to profits, time is on your side. But when it comes to costs, it is your enemy.
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Hello readers and visitors to the blog site. In today's article, such an important topic as the types of investors will be discussed. After all, it is investors who occupy a special place in the financial markets.
Nowadays, the sphere of investment is a very well-known and widespread type of financial activity. Some make investments in business, securities, others in IT technology. Some people prefer to receive very high income in a short time, but at the same time taking on high risks, while others want to earn more moderately and at the same time not taking much risk.
Investors are one of the most important actors in economic activity, and they operate in a wide variety of ways. Next, we list all types of investors and try to give them a brief and clear description.
There are the following types of investors
Such investors usually prefer the reliability of their investments. Those. they would rather make a relatively small profit, but with the certainty that they will make it at all. The basic strategy for such investors is to buy the most reliable assets for a long period of time. If we talk about reliable assets, then these are, first of all, shares and bonds of stable companies (Gazprom, Sberbank, VTB, etc.).
As for the investment period, the standard is from 2 years to 20 years. It is the long-term perspective that provides investors with high stability. After all, the higher the investment period, the lower the risk. One of the most famous conservative investors is Warren Buffett. Buffett always invests for a very long time, as he is convinced that in a couple of years it is impossible to extract the maximum benefit from holding papers. The average term that Warren Buffett manages his assets is 10 years.
- Moderately aggressive investor
Moderately aggressive investor
There is something in between conservatives and aggressors. Those. this type of investors, like conservative ones, prefer to keep their investments as much as possible, but at the same time they try to ensure their investments with the greatest return.
The investment period is approximately 6 months to 2 years. With this approach, moderately large profits and no less moderate risks are expected.
This includes people with iron nerves. Such investors pay the least attention to the reliability of investments. They are much more interested in expected returns. And, of course, speculators fit this description.
The term of investments is from one minute to several days. Yes exactly! Buying and selling process valuable papers very efficient, such speculators can make more than 100 transactions per day, and the profitability can even exceed 100-400% of net profit in one month. It would seem unrealistic numbers, but it is. The big disadvantage is that the risks with such a strategy are the highest and you can lose your money in a matter of minutes or seconds. Thus, the goal of aggressive investing is to extract the maximum profit, despite the high risks.
A prime example of an aggressive investor is −
- Experienced Investor
He has a high knowledge of the market and is somewhat similar to conservative investors. Prefers only justified risk. Such investors select the most liquid securities and other assets.
- Sophisticated player
Strives for the highest possible profit, even with the threat of losing all capital.
These were the most common types of investors.
When we hear the word "conservative", something to do with stability and immutability comes to mind. The meaning of the word according to the dictionary is to save, preserve, protect, defend the old. There are even conservative investments - ie. with minimal growth and low, but stable, income, and with almost no risk. But is it really so, and what is conservative investment today?
There are three types of investment strategies - conservative, moderate, and aggressive. So, the main task of a conservative strategy is the safety of your capital. It is not aimed at growth, or at generating income. Its task is to protect against losses and preserve your capital. With the concept defined, let's move on.
As a standard, conservative investments include endowment insurance, accumulative pension programs, government bonds and bonds of large issuers, where the state's participation is high. All these tools practically guarantee the safety, as well as a small increase in your capital.
All these tools are available, they are all available to individual investors, but not everyone is interested. And not because the income is low, but precisely because it is a conservative investment, i.e. those that don't make a profit. And this misconception succumbs to many novice investors.
If we talk about online investment, or, with the help of the Internet, then almost all of the above investments can be made remotely. It's just a matter of time to figure out how. But no one wants to figure it out - it's long, tedious, and almost useless if there is a meager income.
Break the jackpot, but more. This is the desire of most novice investors who drain their money in fraudulent projects, pyramid schemes, out of inexperience and naivety. And it is after significant losses that the first glimmers of reason appear for those who did not give up - they begin to study the basic concepts of the investment world, and only then invest their capital.
conservative investment, this is where the investor needs to start. This is the first step - to study, to understand, to plunge into the world of investing, not to drown there and not to be eaten by experienced sharks.
The second step is moderate investments, where there is more risk, but also better returns. Well, the pinnacle of this is aggressive investment. They are not available to everyone, but to many. This is a high return, high volatility, but also the highest risk of capital loss. To play in such investments, you need to be an experienced player with a solid capital. The trouble is that many, after one or two successful transactions, begin to mistakenly consider themselves the aces of the game, go to the wrong level and lose everything. Familiar situation, sad consequences.
What type of investment are they? I would classify them as conservative. For all the seeming complexity and danger, it is not difficult to choose a quiet account with low profitability. Although you can play aggressively on this field, the main thing is not to flirt, so as not to merge.
The most conservative investments out there are investments in stocks of various funds and bonds. It is not difficult to do this in the trading terminal.
When compiling my own, I make room for all three investment strategies there. This proportionately reduces the risk and increases the return.
There is an interesting theory that says that your age should equal the proportion of aggressive investments in your portfolio. Accordingly, the older you are, the larger your conservative part of the portfolio should become. But having tried many theories and options, I personally determined for myself that, after all, conservatism is closer to me - although no strategy or asset can guarantee the safety of funds today.
There are plenty of investment tools on the Internet today - from those that promise unimaginable profits, to more real numbers. But that is the task of a conservative strategy, so that from all this diversity and, excuse me, shit, choose exactly those assets that, in addition to preservation and protection, will bring profit.
Today, the West world, it seems to me, is becoming volatile, and in order to receive income you need to understand investing, control your assets and greed, along with a fucking ego. This is the key to consistent income and capital growth.
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So, the main part of the training course comes to an end. In this lesson we will talk about a topic that is quite interesting, both from a practical and theoretical point of view: the characteristics of an investor.
This material will allow you to better know yourself as a future or already established investor and, in accordance with your personal characteristics, correct and carry out your own investment activities, but first things first.
Article plan:
Types of investors, what are they?
The type of investor is a feature of the investor that shapes his behavior.
Investor behavior is shaped by a combination of several factors. For example, risk appetite, return requirements, investment horizon, a subjective view of a particular investment instrument, a particular company, industry, country, etc. In general, as you can see, there are a large number of factors on the basis of which investor behavior is formed.
So, let's look at what types of investors still exist. Investors can be classified according to the following factors:
- Risk Inclination/Reward Requirement
- The term for the implementation of investment activities
- Type of investment strategy used
- The level of financial literacy
By risk appetite and return requirement
This factor determines what risk / return ratio will suit the investor in the implementation of his investment activities.
According to this factor, investors can be divided into 3 types:
- Conservative investors
- Moderate Investors
- Aggressive investors
conservative investor
It is special in that it tries in every possible way to avoid the risk of volatility, that is, fluctuations in the value of investments, as well as other types of risk with which, one way or another, investment activity is associated. Some "instances" are so afraid of taking losses that any fluctuations in the investment portfolio lead to health problems.
To reduce risk, such an investor accepts a low return on invested capital.
Moderate investor
Not ready to receive a minimum return on invested capital, only in order to minimize the risk. The reaction to fluctuations in the value of the investment portfolio of this type of investors is not as sharp as that of conservative investors.
The moderate investor invests in various asset classes, both equity and debt. This allows you to get a higher return compared to the investment portfolio of a conservative investor.
Aggressive investor
It has a high risk tolerance. That is, these are people who, by their temperament, like to take risks in order to achieve certain results, and this applies to any field of activity. In investing, they do the same thing - they take on increased risk to achieve high returns. The portfolio of aggressive investors consists predominantly of equity instruments when it comes to a passive investment strategy. If we are talking about an active investment strategy, then a variety of instruments are used (leverage, derivatives, and so on).
According to the investment horizon
- Short term investors
- Medium term investors
- Long term investors
Short term
Investors of this type are characterized by a short period of ownership, assets. They plan their investment activities no more than 5 years ahead.
A common type of investor in Russia, due to political and economic instability. This is especially true in the 90s, when in most cases it was about survival, but not about investing, in conditions of mass unemployment and default, both by the state and private companies.
medium-term
Long term
This type of investor is the least numerous, especially in Russia where market economy only goes its own way of becoming. The term of ownership of investment assets is from 10 years. The reasons why this category of investors is not widespread are stated above.
According to the investment strategy used
Here the classification will be carried out according to the type of investment strategy used. and their varieties, we have considered before.
So, according to investment strategies, there are:
- active investors
- Passive investors
Active investor
Earlier there was a lesson on investment strategies. In it, I examined in sufficient detail both passive and active investment strategies, as well as the advantages and disadvantages of each strategy and their features, but I will still briefly repeat myself.
An active investor is convinced that anomalies are constantly present in the stock market, and that most market participants are mistaken when valuing a company. This type of investor hopes that he will be able to correctly assess the potential of the company and acquire promising shares at a low price in right time. Accordingly, active investors expect to constantly extract additional profitability from the situations described above.
The main goal of an active investor is to receive a return above the market average over a long period of time. He will achieve this goal by searching for a promising country, industry, and finally, undervalued stocks for their purchase at low prices and further sale at high prices. Of course, in order to fulfill their plans, an active investor must show the results of work higher than other market participants.
Passive investor
Agrees with the average return shown by the market. The passive investor does not try to outplay the professionals. He is convinced that the only way to win the “definitely losing game” is not to play it. It uses the principle of indexing in its investment activity. This principle involves the purchase of securities included in the stock index. That is, a passive investor uses diversification to his advantage and tries to maximize it. Owns investment assets for as long as possible (the term of ownership depends on the personality of the investor).
By level of financial literacy
Investors may have different levels of knowledge in the field of investing, so they can be distributed as follows:
Low level of knowledge
Average level knowledge
Advanced level of knowledge
Low level of knowledge
Investors with low knowledge of investment activities are a common option, they mainly resort to the services of an investment advisor or broker to achieve a positive investment result.
Average level of knowledge
Investors with an average level of knowledge are less likely to turn to consultants and increasingly make investments on their own with the help of financial intermediaries (mutual investment funds, banks, brokers, etc.).
Advanced level of knowledge
Investors with an advanced level of knowledge, of course, do not turn to consultants for help in compiling an investment portfolio, they themselves can provide such services. Use all available investment instruments to implement their investment strategy.
So, the classification of investors according to various factors can be completed. Above, I have already mentioned the fact that investor behavior is formed due to a combination of several factors, and there are quite a lot of factors, so the behavior of investors varies quite a lot.
Well, for example, an investor may have an average level of knowledge in the investment field, be conservative, long-term and passive.
Or it can be aggressive, short-term, active, possessing an impressive amount of knowledge.
So, now I will give some recommendations for the types of investors discussed earlier. Recommendations will be of a practical nature on the distribution of assets in the portfolio of a passive investor. The choice of the ratio between debt and equity instruments is fundamental in investment activity, which must be made first.
conservative investor
For investors of this type, I can advise the following: if you cannot control yourself and take on some risk, you should allocate funds in an investment portfolio, naturally in fixed income instruments. The classic low-risk portfolio option is a combination of a bank deposit and bonds. For most investors, the option of buying bonds with the help of mutual funds is suitable.
If you can control your emotions to some extent and take little risk, then it is worth including 10% of stocks in your portfolio. It is also worth acquiring them with the help of index mutual funds.
Moderate investor
For such investors, I can recommend spreading funds between debt and equity investment instruments in combination, for example, debt / equity - 70/30. This is an example, and if an investor can slightly increase the risk of the portfolio, then it is possible to increase the proportion of shares. If the opposite situation occurs, it is necessary to reduce the share of shares.
Aggressive investor
The advice here is this: an investor should concentrate on equity investments, as they show the highest profitability in the long term. Of course, you can't make your investment portfolio 100% stocks; fixed income instruments should be in it. The share of debt instruments should be from 10 to 20%.
Short term investor
If the investment period is 1-5 years, then best solution there will be debt investments. Reason: The value of equity investment instruments is subject to significant fluctuations in the short term. In general, a variant is possible when the period of investments falls just on the economic crisis and the cost of investments will drop sharply. With regard to the impact of inflation on invested capital, in the short term, its impact is not so significant. In addition, stocks cannot provide stable returns in the short term.
Medium term investor
If the investment period is 5 to 10 years, then the scales begin to move towards equity investments. I.e The best option in the medium term, there will be a distribution of funds between debt and equity instruments - 50/50. This ratio will make it possible to receive a quite decent current income from the debt component of the portfolio, as well as a moderate capital gain from the equity component. Also, I can explain the increase in the share of stocks in the portfolio as follows. With an increase in the investment period, the ability of equity instruments to protect investments from inflation increases.
Long term investor
Investment term from 10 years. There can be only one advice here, as much as possible of the portfolio should be stocks. After all, in the long run, it is shares that will help protect capital from the harmful effects of inflation, as well as provide a significant increase in capital. I would also like to note that over time, the risk of owning shares decreases (short-term fluctuations smooth out over time), and debt investment instruments, on the contrary, become more risky, since they cannot adequately protect funds from inflation.
Therefore, the proportion of shares in the portfolio should be as large as possible. It all depends on your attitude towards risk. Even if you are a conservative investor, there must be stocks in your portfolio, even if their share is not large, for example, 5-10%. A moderate investor can afford 40-60%, and an aggressive 80%.
Passive investor
Active investor
The reasons why I will not give you any specific recommendations have already been voiced in the lesson: investment strategies.
Regarding financial literacy, I can give a universal recommendation: always try to improve it, because the higher the level of financial literacy, the more effective you will be as an investor. This applies to both active and passive investment. In both cases, there are opportunities to increase the return on investment. True, the amount of knowledge that an active investor will need is an order of magnitude greater than the amount of knowledge required by a passive investor. And don't forget that the best investment is an investment in self-education.
conclusions
Well, this lesson turned out to be quite capacious, despite the fact that my goal was to compactly present the material. In this lesson, you could look, both from a practical and theoretical point of view, at the characteristics of an investor, at the factors influencing his behavior, and also get some recommendations for various types of investors. I think that everyone who has learned this lesson will be able to apply the knowledge gained in practice and improve the results of investment activities.
Let's move on to the next lesson:
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However, in recent years, investors are increasingly beginning to realize that certain risks are also inherent in the deposit. A sharp jump in inflation can partially cover the income on the deposit. A weaker currency could depreciate the amount against potential planned expenses such as traveling abroad or buying imported items. Revocations of licenses from banks have become more frequent, which, at best, is fraught with a loss of profitability while waiting for payment from the DIA, and at worst, part of the funds in excess of 1.4 million rubles guaranteed by the DIA.
In light of these changes, stock market instruments are becoming increasingly popular among private investors. However, not all instruments are suitable as an alternative to a bank deposit.
In this review, we present exchange-traded instruments that are closest in reliability to a deposit for extremely conservative investors, which are simple and accessible for use, and in some respects turn out to be even more effective than a deposit.
Federal loan bonds
The return on OFZ investments is provided by the state, they are quite liquid and suitable both for long-term investments and for the purpose of “parking capital” for several months on demand. At the same time, in such short-term cases, a significant advantage over the deposit will be the ability to quickly and without loss of profitability withdraw funds in full or in part for the necessary needs.
OFZ-IN
For an extremely conservative long-term investor, it may be important not so much flexibility as the reliability of the deposit and the guarantee of profitability in the face of changing market conditions. One of the best alternatives to a deposit in order to protect against inflation is securities.
These securities allow you to consistently receive a small yield above inflation, the payments are guaranteed by the state and investments in them do not require any special knowledge. These papers from the class are an excellent alternative to a bank deposit and an option to form your own pension. Unlike a deposit, the yield on them will consistently outpace inflation.
Currency basket
Investments in the OFZ-IN mentioned above protect capital from inflation, but in the event of a sharp depreciation of the national currency, they will not compensate you for losses if the money was set aside for a trip abroad, the purchase of expensive imported items, or other expenses in foreign currency.
Therefore, in order to compensate for such a risk, it makes sense to initially determine the approximate share of capital that will be used in the future for foreign exchange expenses and store these funds in the appropriate currency. It can be regular cash or a bank deposit. When using a foreign currency deposit, it should be remembered that the maximum amount of payment for insurance will be no more than 1.4 million in ruble equivalent. Accordingly, with a strong weakening of the ruble, the currency amount on the deposit may not be fully insured.
Eurobonds of the Ministry of Finance
Another option for placing funds in foreign currency is Eurobonds of the Ministry of Finance denominated in dollars, which makes this instrument more predictable and understandable for a private investor. The most liquid of the issues traded on the Moscow Exchange is RUS-28 with a par value of $1,000 and maturity on 06/24/2028. To access a wider list of Eurobonds, you can seek advice from your financial advisor or personal broker at BCS.
Cash is also an investment
Cash in different currencies, not placed at interest, can be a good choice in certain economic situations. During periods of increased turbulence in the markets, the stock of free cash can allow you to get good interest rates on the same deposits or bonds with timely investments.
If you choose this option, it makes sense to go into "active waiting" mode and constantly monitor available offers in order to use the most effective opportunities. Then the lack of profitability for the period of being "in the cache" can be more than offset by a higher fixed interest rate.
Shares of "Blue Chips"
At the risk of being pelted with tomatoes in the comments on the topic “Stocks are risky!”, I will offer a long-term investor an alternative to deposits in the form of a basket of shares of large Russian companies with state participation.
In the short term, stocks are undeniably too volatile to be put on a par with a deposit. But on a long-term horizon of more than 5 years, the return on shares is able to outperform other conservative instruments. In Russian realities, the most reliable companies are close to the state, such as Sberbank, Rosneft, VTB, ALROSA, Gazprom, InterRAO, RusHydro, etc.
For example, the index of companies with state participation, calculated by the Moscow Exchange since December 2011, as of the end of 2017, brought about 13% per annum. And this is without taking into account the dividends received by shareholders. Of course, there were drawdowns within this period, but if an investor expects a long period of time, then a portfolio of shares of such companies can be a good investment with low risks and a good alternative to a bank.
At the same time, the selection of suitable securities for the portfolio in this case turns out to be a more time-consuming process than simply choosing a suitable bank deposit and requires some knowledge from the investor or consultation with a competent specialist. In addition, you need to soberly weigh how likely it is that the invested funds will suddenly need to be returned ahead of schedule.
Structured products with capital protection
Often, investment companies can offer structured products to clients with 100% or 90% capital protection. Such an instrument consists of an investment part, which provides increased income, and a protective part, which allows you to count on a return of a designated percentage of the investment in any outcome. Such a product can be short-term for a period of 6-12 months, or longer-term for a period of 3-5 years.
The yield on such structured products may be fixed at a level above the rates on deposits, or be not guaranteed, but potentially unlimited. At the same time, it should be noted that the guarantor of the return on investment, unlike a bank deposit, is not the state, but the investment company itself. Therefore, the level of reliability in this case closer to a corporate bond than an OFZ.
In addition, you must carefully read the terms of the structured product and make sure that the return of the guaranteed amount is unconditional, i.e. independent of market conditions. Also, do not confuse capital protection products for conservative investors with high-yield, high-risk instruments, which can be similar to each other on the surface.
IIS
Do not forget about such a tool as an Individual Investment Account. are probably well known to you and do not need to be listed. It can be used in combination with the ruble instruments listed above and bring additional profitability in the form of a tax deduction, which in the long run has a significant impact on the final financial result.
Successful investment activity cannot be carried out without a properly chosen investment strategy. Each novice investor is faced with the task of competent distribution of available Money between different investment sources. Not less than important role also plays the intensity of the purchase and sale of assets. The types of investment strategies and their correct combination is the key to success for any investor.
Naturally, it is necessary not only to have theoretical knowledge, but also to be able, based on existing economic realities, to select the optimal ratio of specific actions on stock exchanges and other financial markets.
It is customary to subdivide the existing types of investment strategies based on 2 parameters:
- projected return on investment;
- potential risks of losing investments.
In economics, it is traditionally customary to distinguish four types of investment strategies:
- conservative (passive);
- moderate;
- aggressive;
- mixed.
Each investor needs to understand that for each of them there is a direct proportional relationship between the actual risks and the level of profitability (profitability). In other words, the higher the risk for a particular investment, the higher the profit the investor is able to expect accordingly. And vice versa. The lower the level of risk, the lower the return, and, therefore, the attractiveness of the investment in question.
Now I propose to analyze in more detail each of the above-mentioned strategic types.
Conservative (passive)
A conservative (passive) investment strategy implies the lowest profitability. IN different sources it means the level of profitability up to 15-20 percent per annum.
At the same time, in this case, the investor is dealing with the lowest possible level of investment risk. That is, such investments in practice practically do not threaten the loss of invested capital.
Classical examples of conservative financial instruments include:
- bank deposits (deposits);
- government bonds;
- investments in real estate;
- buying gold or platinum;
- shares in conservative mutual funds.
Moderate
A moderate investment strategy implies more high level profitability. As a rule, we should talk about 20-45 percent per annum.
As we already know, with an increase in income from investments, the real level of risks also increases. That is, unlike conservative investments, moderate ones can no longer be considered safe.
The classic examples of moderate financial instruments are:
- securities placed by highly reliable companies;
- investments in microfinance organizations;
- more profitable shares of mutual funds.
Aggressive
An aggressive investment strategy implies the highest profitability above 45-50 percent per annum. In practice, the yield can be several orders of magnitude higher than the announced values. Sometimes it reaches 100, 300 and even 1000% per annum.
It is obvious that when working with such super-aggressive financial instruments, the investor is faced with prohibitive risks. In some cases, their values tend to the absolute, that is, to 90 and even 100 percent.
We can consider classic examples of aggressive financial instruments:
- financial pyramids;
- investments in PAMM accounts.
Mixed
Any truly successful investor will tell you that it is impossible to consistently make a lot of money using any of the above strategies in its purest form. In everything, you should seek and find a balance. Mixing in certain proportions, the listed types of investment strategies just help to find that very middle ground.
A mixed investment strategy is an optimal combination of several types of financial instruments that differ in terms of profitability and riskiness.
Output
As we now understand, the primary task of each investor is the formation of his own optimal investment strategy, which will be best combined with his unique psychological profile. Naturally, there is no ready-made recipe here and cannot be. Moreover, it may take years of continuous practice to find the only correct answer.
But what about a beginner who does not yet have any serious theoretical knowledge and experience? How can he form his first investment portfolio?
For such a case, there is classic version investment diversification. In accordance with it, the investment portfolio must be formed from the following financial instruments:
- conservative (55–60%);
- moderate (30–35%);
- aggressive (5–10%).
Based on the above characteristics of investment strategies, such a combination seems to be quite safe and at the same time quite profitable.
Tell us about your investment experience in the comments. I'm sure other readers will find it very interesting.