There are three types of investors, and knowing which group they fall into can help them become better investors in the future.
Type 1: The Pre-Investor
A pre-investor is not currently investing and probably doesn’t think much about investing in the future. These types are mainly wage earners that are living paycheck-to-paycheck just waiting for the next pay raise.
Their thinking is that whatever extra money they get, they will spend on something like a night out, a new toy or maybe a vacation. They haven’t realized yet that they should be creating an emergency fund and then start investing for the future.
Type 2: The Passive Investor
A passive investor is an important step up from a pre-investor. The passive investor realizes that they need to start investing for the future and financial security. They know something about investing but do not actively manage their own stock portfolio. A passive investor might be somewhat averse to risk, which is a good thing.
Passive investors account for 90% of investors. They understand that it is necessary to have their money work for them. The passive investor probably funds a tax-deferred retirement plan, saves at least 10% of their monthly pay and understands asset allocation.
Passive investing is simple and doesn’t require a lot of knowledge or time. Investing in mutual funds, fixed assets, broad market ETFs, and averaging down are all good passive investments.
Type 3: The Active Investor
An active investor will have more market knowledge and spend more time with their investments. They will take what they learned as a passive investor and become more involved with their investments.
They continue to learn and watch their investments closely. They understand how a small difference in interest rates over a long time makes a big difference in wealth accumulation. They understand compounding interest and how it works for them. Being an active investor is more work, but it’s worth it. They form a plan and make rules that they stick to.
When to Buy or Sell
One of the most important rules of being an active and sometimes even a passive investor is knowing when to buy or sell. Knowing when to invest in the stock market can be easier if you buy stock with each paycheck or each month on the same day. This is known as dollar-cost averaging and helps take the volatility out of investing.
Knowing when to sell can be trickier. Active investors might have their own rule that tells them to sell whenever a stock is down a certain percentage or if some other criteria are met.
According to the experts at SoFi, “Knowing when to buy, sell, and hold stocks can be less confusing when an investor does the research into company health, overall market conditions, and their own financial needs as relates to personal short-term and long-term goals.”
Once a person graduates from a pre-investor, they can be successful by being a passive or an active investor. Either type will be better off than a pre-investor in the long term.