When it comes to investing the first thing you need to decide clearly is what type of investor you will be. This question is a fork in the road which comes at the very beginning of your investing journey that will completely dictate the nature of your investment activities.
Although you must clearly decide, don’t panic or worry about choosing incorrectly because you will be able to change course down the road and invest the other way if you so choose. Your choice is to be either a passive investor or an enterprising investor.
The Passive Investor
The passive investor is one who wants to make the minimal amount of decisions and to put forth a minimal amount of study or effort to achieve his or her investment results. Ongoing thought or research is not what the passive investor wants to do. Because of this fact the passive investor must be a very broadly diversified and must consign himself or herself to AVERAGE results. To expect better than average results from average or less than average effort is both unrealistic and foolish.
However, it is no small accomplishment in the world of investing to achieve the market average and the truly passive investor should be commended for recognizing his or her style and achieving such great results without being tempted to jump in and out of investments or otherwise make poor decisions and thus underperform the market average.
The typical investment vehicles available to the passive investor would be CDs, low cost mutual funds of both stocks and bonds, and exchange traded funds (ETFs). Simply purchasing every stock in the Dow Jones Industrial Average and holding on to them for life would also fit into category of being a passive investor.
The Enterprising Investor
The second type of investor is the enterprising investor. The enterprising investor is one who is willing to put some effort into his or her investment decisions in hopes of achieving some extra returns over and above the market average. This extra effort really needs to be done oneself and cannot be effectively hired out. When a person is hiring this effort done or otherwise using an advisor they have crossed into the realm of the passive investor and cannot consistently expect better than market average results.
The enterprising investor has weighed and understands the various risks that the investments face. He or she also has a good grasp of how the investment grows and makes money. Lastly, this investor has made his or her own appraisal of the value of the various investments and has a relatively good idea of the real or intrinsic value of the investments. Each position the enterprising investor owns required a good deal of study up front before purchasing and continues to require at least a few hours per year of follow-up and evaluation.
The investment vehicles available to the enterprising investor could include any type of investment imaginable, but typically would be limited to individual stocks, bonds and real estate property.