Monday 29 April 2013

What type of Investor are you?

There are a multitude of investment opportunities and investment products available today to help investors meet their goals, which might include retirement or financial independence.  Before you look at those products in detail you must first ascend to 30,000 feet and decide what type of Investor you are or intend to be.  At this level I see there are essentially 4 types of investor which can be profiled by answering 2 questions:

  1. Am I going to be an Active or Passive Investor?
  2. Do I want to be DIY or have somebody make my investment decisions for me in consultation with me?

Let’s look at each in turn.

Active vs Passive Investing

The debate over which of these strategies is better has been going on for years.  Passive investments aim to do nothing more than track a market index.  That could be a stock market index like the FTSE All Share Index or a bond market index like the Barclays UK Government Inflation-Linked Bond Index.  These types of investments don’t need talented managers or analysts but simply a decent computer system that will enable the assets purchased to replicate the market.  Importantly when selecting these types of investments you will be looking for ones that track the chosen index as closely as possible.  Therefore if you are passive investing well you will never beat the market but should get pretty close to its nominal performance.

Active investments on the other hand are run by professional managers who are supported by analysts and researchers.  They will conduct extensive market research on the investment opportunities within their remit with the specific aim of beating the market.  It must however be remembered that the law of averages dictates that for every active investment manager that beats the market somebody or something has to not beat the market.  Some of these will be other professional managers.   Pick one of those and you would have been better off going passive.

Active investments typically carry higher expenses than passive investments.  After all those managers, analysts and researchers aren’t working for free and expect to be paid.  Therefore they must beat the market by at least their expenses if they are to be a better bet than the passive investment option.

DIY or Financial Advisor Investing

The second decision you need to make is are you prepared to go it alone, make all of your own investment decisions and live with the consequences.  It should not be underestimated how important planning for retirement or financial independence is.  In many instances you will only ever get one shot at it.  If you go DIY you must be therefore prepared to read a lot and really think through what you are trying to achieve.  You’ll need to accurately assess where you are today, where you want to go and when you want to get there.  You will need to determine how risk tolerant you are, while also realising that, for example, 100% of the lowest risk asset class today will likely not give you the lowest risk portfolio.  You’ll then need to crash all of that information with a lot of research on different asset classes and investment wrappers to build a diversified, tax minimised investment portfolio, with expenses at a level you are happy with, that will give a high probability of meeting your goals.  You’ll need to t
hen review your portfolio regularly to determine if or when you want to rebalance those investments and also ascertain if you are still on target to meet your goals.

If you don’t believe you can do the above then it’s likely a Financial Advisor is for you.  Just remember that one of those doesn’t come for free.  

The Next Step

Of course the answers above do not necessarily require black and white answers.  It’s certainly possible to mix and match.  I also can’t tell you what’s right for you.  Only you will know that but what I can say is that I went through exactly this dilemma back in 2007.  How did I resolve it?  I firstly read some very good books.  Some of the more notable ones that made a big difference to me are detailed in the Books That Helped Me tab directly below my banner above.  Additionally there are some great free personal finance websites and forums out there to learn from.  Just remember though some of the advice on those can be worth exactly what you paid for it.  Finally, go out and talk to a few Financial Advisors.  Most will give you an initial free consultation.  Use it to ask some questions and find out if they can really help you.  Most of all take your time and get it right first time.  These decisions are likely going to be with you for many
years so spend a few months assessing your options.

RIT’s Choice

After I went through the above process I realised that I was a Passive DIY Investor.  One of the major learning’s that I had was that as I read and talked to people I realised that I actually enjoyed learning about investments and personal finance.  It is now one of my hobbies.  Additionally I realised I had an aptitude for the number crunching needed.  I probably make that far more complicated than it needs to be but that’s for another post.

Has it been all smooth sailing?  No definitely not.  I’ve made plenty of mistakes on the way, some of which I share on this site but overall for me it’s been a positive experience and the right one for me.  Has it given me the best return possible for my risk tolerance?  I have no idea and I will never know but importantly I do believe it is sufficient to get me to my goal.

As always DYOR.


  1. Hi RIT,

    Been seriously learning & investing for about 2 yrs now. Portfolio of index funds, investment Trusts and a HYP shares. The HYP is buy & hold unless their are events like severe dividend cuts, company takeovers etc

    Does the IT's and HYP make me an active investor ?

    Would be interested in your thoughts.

    1. Hi Anonymous

      Sounds like you're doing a bit mix and match.

      I don't know what IT's you own (and I'm no expert on IT's) but they'll likely not be tracking an index but rather attempting to beat the market. So they'll likely be Active.

      The Index Funds are Passive as they'll be trying to do nothing more than track an index.

      The HYP is an interesting question. They're certainly low expense at 0% pa. Once you buy them you're also not buying and selling to try and beat a market but instead simply taking all those lovely dividends. I'd lean towards a HYP being a Passive investment.

      Do any readers have a different opinion?


  2. Dialog provoking post?

    Not sure I like this classification.
    Active/Passive is more about selection of type of funds. DIY or not is more about maintaining a portfolio of individual stocks or, as non-DIY, funds investment with some sort outsourcing portfolio management. I suspect you are referring to DIY from the point of building a portfolio of funds rather than just buying fund-of-funds/life styling?

    As somewhat "aggressive" investor, I maintain a set of passive/active funds where passive ones playing role of "bulk" exposure to geographical region and active and much more selective and targeted. Active allow some "special" portfolio construction which may not be easily backed by an index.