Whether you are a do-it-yourself investor or you rely on a financial advisor you have an overall strategy of choosing your investments based on your profile, risk tolerance and beliefs that will enable you to achieve your objectives.

Related: 5 Challenges DIY Investors Face

What investing style fits you?

Index investing

An index is a broad representation of a market and is considered the benchmark for performance.  The theory behind index investing – also called passive investing or couch potato investing – is that it is almost impossible to consistently outperform market averages.  Index mutual funds and basic ETFs replicate and passively follow the ups and downs of market indexes such as the S&P/TSX Composite Index or the DEX Universe Bond Index.  They aim to match the returns of the benchmark as closely as possible.

This is a good starting point for beginning investors and is also successful over the long term for anyone who doesn’t have the time to follow and research the markets and/or wants good performance at low cost.

Finance writers such as David Chilton and Suze Orman were advocating index investing way back in the 1980’s.  Those who chose this strategy at that time, stayed the course through market fluctuations, and re-balanced as required, would likely be sitting pretty today.

Related: Chilton, Lang and O’Leary On Mutual Fund Costs

The classic allocation is 40% Bonds / 20% Canadian equities / 20% US equities / 20% International equities, but you can choose any balance that suits your risk tolerance and time horizon.

Dividend investing

The appeal of buying dividend-paying stocks is, of course, the predictability of income.  If you own shares in solid companies you are virtually certain of receiving the quarterly (or sometimes monthly) payment, regardless of market fluctuations.

A great investment is a company that is value priced, has growing revenue and increasing dividends, that is held for the long term – also known as buy-and-hold investing.

Some companies offer stock purchase and dividend reinvestment plans for little or no cost, making it affordable for small investors.

Related: Dividend Investing – How To Get Started

The main disadvantage can be lack of diversity, for small portfolios and investors who hold only Canadian dividend payers.  To offset this, you can purchase US companies (see US Dividend Aristocrats), especially those conglomerates that have global holdings and/or Deposit Receipts.

Value investing

Value investors are avid sales shoppers.  If you are willing to put in the effort look for out of favor stocks whose intrinsic value is higher than the market price, have low price to earnings ratios and generally have higher dividend yields.

One value strategy is known as “Dogs of the Dow.”  With this strategy the top ten stocks are chosen at the end of the year that have the highest dividend yield relative to price.  Invest an equal dollar amount in each stock, and then repeat the following year.

David Stanley has a similar approach for Canadians called “Beating the TSX.

Growth investing

This is an active management style for sophisticated investors or people who like to pay money managers the big bucks for results.  It involves the analysis of companies, financial markets and economic trends.

Analysts carefully select holdings from companies that have potentially high earnings, growth rates, and high profit margins.  These companies are often innovators in their fields (think Research in Motion when they first introduced the Blackberry) grow quickly and reinvest most or all of their earnings in continued growth for the future.

Related: How Do You Know When To Sell Your Stocks?

To be successful you need to buy early and have a definite sell price.  By the time the average investor hears about these companies on the local newscast, it’s likely too late.

Conclusion

All of these styles have their fans, and no one style is inherently better than another.  Clearly defining the investment style that fits you will help you select investments that you will feel comfortable holding.

Some investors have a main strategy and include a portion of their holdings in another, such as an index investor who also holds some individual stocks.

Related: How To Manage Your Investment Risk

Sometimes your style may change – especially when knowledge, risk, time horizon and time available to spend on the portfolio changes.

In my case, I used to hold a fairly aggressive portfolio of actively managed mutual funds.  Then I switched my focus to dividend payers.  Now I’m considering taking some of my profits and adding a few ETFs.

What is your investing style?

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23 Comments

  1. Money Saving on November 20, 2013 at 6:16 am

    I’m mostly in the index fund camp with a little bit of value/dividend investing thrown in for flavor.

    • Boomer on November 20, 2013 at 12:24 pm

      @Money Saving: This seems to be a common combination.

  2. Bet Crooks on November 20, 2013 at 7:08 am

    Depending on how your work pension is structured, you may not get much choice about that portion of your investing. One of our DC plans really only lets you choose the percentage you invest in each of a TSX index fund, a NYSE index fund, a global index fund and a bond fund. They are mutuals, not ETFs, but the MERs are lower because the company negotiated a rate different from what someone could buy through a bank.

    We’re very conservative so outside of work pensions we are invested mostly in GICs and some dividend payers.

    • Boomer on November 20, 2013 at 12:32 pm

      @Bet Crooks: Pension plans and group RRSPs are most often mutual funds with lower MERs. I guess they give some consideration for their large captive pool of investors. Ha Ha!

      I would like to see a little more advice given, though. Usually the employee receives a ream of documents to complete, and either a limited fund choice or a huge confusing list to pick from. It’s never looked at again except for a cursory glance at the annual statement before filing it away.

      • Bet Crooks on November 20, 2013 at 3:35 pm

        I agree that there is a HUGE need to give advice. And yet often none is given because the company is afraid of lawsuits if the advice given is poor.

        I think a lot of DC pension contributors are going to get to retirement and find they have nothing to live on. They will either invest too conservatively and not have any money, or too wildly and will lose it all a year before retirement on one of those periodic market crashes.

  3. AdinaJ on November 20, 2013 at 8:11 am

    Definitely index investing. I would like to branch out a bit more, but I’m afraid I would end up making a muck of it. This is an aspect of financial literacy I wish they would teach in schools, because unlike the basics, I don’t find it intuitive, especially for innately risk-averse people like me.

    • Boomer on November 20, 2013 at 12:39 pm

      @AdinaJ: Contrary to what some people believe, index investing is not risk free. They just track the ups and downs of the market. If someone invested in a TSX/S&P index fund in late 2007 their portfolio would have lost a fair bit in 2008 and they would have really lost if they had panicked and cashed out.

      I agree with you that financial literacy should be taught in school. People are now having their financial futures thrust into their own hands. It would be good to know how to manage it.

  4. The Passive Income Earner on November 20, 2013 at 9:46 am

    In my own portfolio, I am all dividend and in my employer contribution plan, I am all indexed.

    I would prefer to be all in dividends though but I can’t complain about my employer contributing to my RRSP.

    • Boomer on November 20, 2013 at 12:40 pm

      @The Passive Income Earner: You can’t beat employer matching.

  5. Gary on November 20, 2013 at 9:54 am

    I’m retired with 60% in dividend paying stocks and 40% in a bank monthly income fund. No company pension, just OAS and CPP. It can be scary at times but we need the income.

    • Boomer on November 20, 2013 at 12:47 pm

      @Gary: Figuring out how to get the income you need from all sources can be a challenge. Just be sure you’re not taking on too much risk to get more.

      Usually stocks from the dividend aristocrats lists can pay well with not too much price fluctuation, but you still have to monitor them, and keep some cash, or easily cashable products, available for just in case.

  6. Grant on November 20, 2013 at 1:51 pm

    I’m 100% passive indexing. I think dividend investing is a pretty good strategy, too, but over the long term it comes out a lttle bit behind a total return index approach. Dividend investing is a lot more work than indexing, but if you enjoy doing it, it’s a good way to go.

    Value investing is very difficult to do well, unless you are Warren Buffet, and he himself says “If you look in the mirror and you don’t see Warren Buffet, buy the indexes.”

    Likewise growth investing amost always doesn’t beat the market over the long term.

    • Boomer on November 22, 2013 at 11:27 am

      @Grant: Thanks for sharing your observations.

  7. fiscally fit on November 21, 2013 at 11:22 am

    the group side of things is WAY under serviced. Many DCPP use seg funds instead of mutual funds as they require less compliance.

    I think you make a good point about how each method is simply different not better or worse than the others. I would argue that a DIY investor can use a financial planner though… or any professional (accountant, lawyer, CFA, etc.) and still be a DIYer. I just they taught a little bit more about price vs. value when it comes to finances

    • Boomer on November 22, 2013 at 11:31 am

      @fiscally fit: I would not disagree with you that most investors could use a financial planner – DIY or not. The challenge is finding one with a matching investment style instead of just going along with their advice. Everyone has their own biases.

  8. Stephen @ How To Save Money on November 21, 2013 at 11:48 am

    I think right now I’d call my investing style “challenged”. I haven’t been able to devote enough time to it to execute any of the styles very effectively and I’m going to have to address that soon. Time is always the issue so I need to get on track with a simple index investing plan and be consistent with it.

    I am actually an index investor, just a really poor one at the present time.

    • Boomer on November 22, 2013 at 11:35 am

      @Stephen: I recommend you get on this soon. You think you have lots of time in the future – and then you don’t.

      It doesn’t take long to set up a good index portfolio. Just don’t over think it. Then add to it regularly (and automatically) and rebalance at least once a year. That’s it.

  9. farcodev on November 21, 2013 at 5:12 pm

    I began by the use of Dividend investing to now by using Value investing.

    • Boomer on November 22, 2013 at 11:36 am

      @farcodev: You could say that value investing is a variation of dividend investing.

  10. Kevin on November 21, 2013 at 9:46 pm

    Although I am constantly reading about finance, I am definitely an index investor, probably about 90%, with roughly 10% in a select group of dividend payers. I find this strategy allows me to sleep easy during fluctuations knowing I should be fine in the long run!

    • Boomer on November 22, 2013 at 11:38 am

      @Kevin: The appeal of index investing for most people is that is simple to set up and maintain, doesn’t take a lot of time, and is successful in the long run. The key is to stick to the plan.

  11. Kanwal Sarai @ Simply Investing on November 24, 2013 at 1:30 pm

    Great post Marie!

    I’m a dividend value investor. Which means I focus on dividend paying stocks, and only purchase them when they are undervalued.

    cheers,
    Kanwal

    • Boomer on November 25, 2013 at 11:30 am

      @Kanwal Sarai: I like you!

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