Saturday, March 1, 2008

Types of Investors

From what I understand, there's three broad groups of investors in the market:

Long-term Investors
These sorts look at the fundamentals of a holding and buy for the long term, weathering out the ups and downs in order to see long term gains. Most consumers seem to long term investors, and it's certainly the mentality that's pushed by the financial services industry. The good thing is that over long periods of time, stocks and other investments do rise, so for things like retirement funds, long-term investing does work.

The downside is that because long-term investors hold on through the down cycle, they have to see higher returns on the up side in order to arrive at the same place as others. In recessions, markets usually lose around 30% of their value, and have lost as much as 50%, so when things recover, long term investors need to see a gain of 42%, and as much as 100% just to get back where they started. Another problem, particularly with small individual investors, is the panic psychology...many of us, and I include myself here, will panic when we've lost 10%-20%, and end up selling off, and then missing the recovery. This has been one of my biggest problems in my past dealings with mutual funds, and something I'm hoping to avoid going forward.

Traders -
Traders keep an active watch on the market, look for bargains, and then sell when they've seen the return they're looking for. Some traders also look for overpriced stocks to sell short, and again, cover them when they've seen their target return. From what I know, this involves taking into account the fundamentals of a company, as well as technical analysis on how it's trading. I'll discuss what I've learned about analysis in another post.

Speculators -
These are your high risk, high reward types. There's a lot of grey space between trading and speculation, but basically what makes a speculator different is that they completely discount the fundamentals of a company, and focus entirely on short term movements in the market.

Myself, I'm aiming to be more of a trader than anything else. Shorter term profits, hopefully, but still keep track of the fundamentals of a company, so if it doesn't go up as expected, I can confidently hang on until it does.

No comments: