Investors may also invest in stocks based on whether they are perceived to be growth stocks or value stocks. Growth stocks are shares of companies considered to have the potential to outperform the overall market in the long run due to their future potential, whereas value stocks are classified as companies that are currently trading below what they are really worth (undervalued) and will thus provide a superior return. Growth stocks typically have the potential to perform better when interest rates are falling and company earnings are rising. However, they may also be the first to be punished when the economy is cooling. Value stocks, on the other hand, may do well early in an economic recovery but are typically more likely to lag in a sustained bull market.
Rather than going through the stock selection process, some investors prefer to place their money directly in investment funds, which can be actively or passively managed. Investment funds also come in the form of investment trusts – closed ended funds in which fund managers cannot redeem or create shares.
Passively managed funds stick to a portfolio strategy determined at the outset of the fund, aiming to minimize the ongoing costs of maintaining the portfolio. Many passive funds are index funds. Although passive funds often incur very low fees and are highly transparent, they tend to exhibit lower returns. Exchange Traded Funds (ETFs) are a type of passively managed investment fund that seeks to track the performance of an index, usually a stock market index.
Active fund managers, instead, seek to outperform the market as a whole by selectively holding securities according to a dynamic and ever-changing portfolio strategy. Their investment flexibility is an attractive proposition, but it is important to note that they often have elevated fees and can exhibit higher levels of risk.
The question of which investment fund you should select is based on your own unique investment objectives and level of risk aversion. It is important to do your due diligence on a wide variety of investment funds to make sure you choose the right one that suits your long-term financial needs.