We all know we need to invest our money to save for retirement, but how should we go about it? What are the different investment styles, and how often should you change your style?
I’ve heard these questions time and again, which is why I brought Robert Sanders — one of my partners and the chief investment officer at Capital Investment Advisors — onto the Retire Sooner podcast to get his thoughts and walk through a few different styles of investing that you might consider for your portfolio.
The style Robert primarily focuses on is income investing. The premise behind income investing is to generate cash flow from nearly all investments. Do this by owning stocks, bonds, real estate, private investments and any other asset that can pay out a steady stream of dividends, interest, and/or distributions. The investor typically wants to identify companies that have historically paid consistent income over time and continue to pay even under reasonable levels of stress. Think dividend-paying companies.
That consistency is why Robert focuses on income investing. Prior to retirement, the money received is generally reinvested to help accelerate portfolio growth. At retirement, the income from the investments becomes a “paycheck” and allows investors to do things they love.
However, it’s not the only investment style. There are many. Let’s walk through a few other examples.
Value investing focuses on investing in companies that could be trading at a price below intrinsic value — that is, their book value. These may be companies that produce goods or services which are not likely to swing widely in demand, allowing a more predictable cash flow resulting in consistent dividend payments. Think, for example, about companies in the consumer staples sector. These are companies that sell products we use every day: food, beverages, household goods and hygiene products. Demand for these companies is inelastic, or to put it in other terms, these are the “must haves.” There isn’t much change for demand even when prices increase. These are the types of companies that value-investors tend to focus on because they’re looking for a consistent investment return that’s not necessarily going to outperform the market.
Another example would be growth investing or seeking companies with higher revenue upswing potential, regardless of earnings. These are companies whose products or services might not generate revenue, but their future earnings potential is high. These could be companies with great technology and ideas for products, but they might not have the sales of the products yet. In fact, they might not even have the products to sell — just prototypes. We’ve seen this recently in the electric car space, for example. Growth companies tend to have higher investment return potential; however, they’re more likely to be inconsistent with their returns.
A third style that some investors use is momentum investing. This relies heavily upon charting the price of securities, assessing their moving day averages, and then buying with the idea that they will continue on a similar moving average. Examples of momentum investing could be for an investor to continue investing in technology stocks that have had continued positive stock performance, or even more recently it could be investing in the latest “meme” stock — those that are popular on the internet right now.
All of these styles have a historical track record of working. The crucial point, Robert stresses, is to pick a strategy you feel best suits your needs and risk tolerances, and then stick to it. If you “chase” styles you can get yourself in trouble.
One of the biggest mistakes some investors make is switching from one style to another because a certain strategy is underperforming. Why? Because one of the most powerful forces on the planet is mean reversion.
Mean reversion is the principle that over time, asset returns are generally stable and will move toward their average. For example, asset prices tend to go back above their average price after a period of being below to deliver around a historical average. Conversely, if an asset’s current value is above a well-established fair value, the market tends to move back down.
So, if you buy during a downward cycle, then switch because an investment is underperforming, you’ve been hit twice because you bought as it was going down, then sold before it had a chance to rise.
For sports fans, take 2021 Atlanta Braves World Series MVP Jorge Soler as an example. Hypothetically, if his career batting average was .250 (baseball speak for 25%), would that mean he literally and sequentially got one hit every four times at bat? No. That’s just the overall average, or mean, once all the numbers (a.k.a. hits) were calculated.
Let’s say one month he was batting .500. Based on his usual average, it would be reasonably safe to wager that in the following month he wouldn’t get as many hits. Likewise, if he fell into a 0-20 hitting slump, you could assume he would bat more effectively over the course of the next 20 at bats. As long as you have enough data you can find the trend line and make logical decisions. Investing styles work in similar fashion.
Find the investing style that fits your goals and risk appetite and stick to it. FOMO (fear of missing out) can derail a solid investing strategy. To combat against it, Robert reminds himself of the wise words often attributed to J.P. Morgan: “Nothing so undermines your financial judgment as the sight of your neighbor getting rich.” Don’t compare your situation to someone else’s. You have no idea what your neighbor’s portfolio looks like behind the scenes. Stay focused on yours.
Jorge Soler doesn’t change his batting technique because of one bad game. He keeps swinging with confidence because he knows that over time it brings him successful results. The next time you’re tempted to chase styles, think of him sticking to his.
This information is provided to you as a resource for informational purposes only and should not be viewed as investment advice or recommendations. Investing involves risk, including the possible loss of principal. There is no guarantee offered that investment return, yield, or performance will be achieved. There will be periods of performance fluctuations, including periods of negative returns. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.
