Types of Investors (4/17/2025)

In light of the incredible market volatility the past few weeks, I want to take a step back with this week’s L.A. Dimes to talk about types of investors and strategies so we can better understand the radically different advice (read: noise) you’re likely hearing. Using a slightly different format than in previous editions, I will be answering questions I received from readers over the past few months about investing fundamentals. 

What kind of investors are there? How do I determine what kind of investor I am and what suits my lifestyle/needs?

The easiest ways to differentiate investors is to split them into two groups -- active investors and passive investors: 

🏃‍♀️ Active investors typically enjoy investing and following capital markets as a hobby. This is a hands-on approach for someone who likes to be in the driver’s seat. They like to be actively involved in the day-to-day management of their account, picking and choosing each individual investment. 

😎 Passive investors on the other hand don’t necessarily have the time, knowledge, or desire to be actively involved in the management of their accounts. If the idea of “set it and forget it” appeals to you, you’ll likely prefer a passive approach. 

Investments, as well as investment managers or wealth advisors, can also be active or passive. 📈For example, mutual funds and ETFs can be designed to be passive in nature, like an index fund, which uses a buy-and-hold approach. This means the fund buys all the investments it would need to track an index and is designed to give you the same return as if you owned the whole market (like SPY, which is an S&P 500 index fund, is designed to give an investor the same performance/returns as if they owned all the stocks on the S&P 500. It is not actively managed, it just owns those same 500 stocks and the performance of the fund mimics the performance of the whole index.)

Active funds on the other hand are managed in the hopes of outperforming the market or a particular index. The fund managers will be more hands-on, making investment decisions frequently to try to achieve greater returns than an index. These types of funds tend to have higher fees because the cost of actively managing the fund is more expensive.  

😃 Identifying the investment style that resonates with you can help you stick to your plan and achieve your goals when things get scary. Given all the recent turbulence in the market, you may hear people like me saying “don’t touch your portfolio”, “ride it out”, “stay the course”, etc, while you may have co-workers, friends or neighbors saying “sell everything!”, “go to cash and wait”, or “put all your cash in right now!”. I’d argue that some of this is sound advice and some of it is a recipe for disaster, but I’ll cover the perils of market timing in a future newsletter. 🙃 

💡 Today’s takeaway is that the folks who are telling you to stay the course and ride out the market volatility are likely taking a more passive investment approach, buying and holding for the long term, and the other people encouraging big changes are taking a more active approach, hoping to outperform the market and be more tactical. I’ll do my best to be objective here, and just say that what works for one person is not necessarily the best strategy for another – so if you tend to be a more passive investor and that approach appeals to you, it’s okay to ignore someone with a completely different investment style than yours. 

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How much money will I make on investments?

How much you’ll make on your investments will depend on what you’re invested in and how long you stay invested. Riskier investments often come with higher returns -- higher risk, higher reward. Higher risk investments include individual stocks; much can be made or lost with these investments. More conservative investments like bonds also provide a return but typically at a lower average annualized rate and in a more predictable fashion. With either type of investment, your return will be greatest the longer you’re invested due to compounding. As your account becomes larger, you earn returns on your returns, this is why getting invested when you’re young is so beneficial - you have time on your side! 

Is it a risk to invest in stocks? What are low-risk investments I can make?

There are inherent risks with all investments, and different types of risks, too. Investing is considered to be less risky than gambling, but be aware that you could still lose everything if you don’t mitigate your risks. Stocks are one of the most volatile investments which means their value can swing greatly from one day to the next. You can lower your risk by investing in less volatile investments, like bonds or treasuries. You could also lower your risk through diversification. You can diversify by buying mutual funds or ETFs, which allow you to spread your risk across hundreds of different stocks or investments.