The pros and cons of two extreme investing styles

We’ve all had to make the decision between going for bigger, for more, and just taking what we get in the process of keeping our investment capitals safe.

We’ve all had to make the decision between going for bigger, for more, and just taking what we get in the process of keeping our investment capitals safe. We consider the riskiness but we also consider the potential returns. At the end of the day, the decisions we make, are those that are directly close to our true heart desires.

Fixed income investments

Fixed Income, as the name implies, are securities that offer fixed income returns. This assurance of fixed returns lies in the guarantee of the principal sum, the assurance of the exact rate of return or interest to expect, as well as the duration.

With fixed income securities, you get a fixed interest rate or dividend at the date of maturity. That means you simply get back the principal you invested in the first place plus the interest you’re getting.

A good example is the interest that is paid on your savings account and it is quite straightforward. You will always know what you are getting back from your investment; you can decipher the end from the beginning.

An implication of fixed income investments, however, is that you don’t get more than you are supposed to get even when things go really well. So if you choose to invest in XYZ Bank for a 1 year period with an interest rate of 4.5% per year and the interest rate theoretically jumps to an impressive 9.5% in that year, it does not benefit you because you already signed up for a much lower rate.

Irrespective of whether the interest rate goes up or down in the financial markets, you still receive your due. Inflation, of course, is another threat to fixed income investments. If this doesn’t sound like fun, there’s another extreme point to try out.

Active Trading

Active trading lies on the other side of the risk field. As opposed to investing in stocks and leaving it to grow for the long term, active trading requires try to beat the market. Typically, active traders/investors tend to keenly watch the market and make trades that will fetch them the highest gains.

Although adopting the active investment approach requires a high level of confidence when making investment decisions and typically involves a higher risk, this investment strategy has its advantages most of which is that it tend to try to beat the market and when successful, this translates to higher than average returns.

However, on the down side, active investing is a highly involved strategy. So when an investor decides to take the path of actively managing their own portfolio, they need sufficient the time for stock analysis and to keep up with market movements.

It also requires increased charges from consistent trades as well as a more-than-basic understanding of trading. It typically requires knowledge of technical analysis like the use of candlesticks like Dojis to predict patterns and more. If this too doesn’t sound appealing, then staying somewhere in the middle is key.

Long term investing strategy

At Yochaa, we are proponents of investing in stocks for the long term. Having considered both trading styles and assessing both their upsides and downsides, we found our sweet spot between both extremes.

While your principal may not be guaranteed (depending on the stability/ the overall fundamentals of the stocks you choose to invest in), you will most probably outperform fixed income securities. That said, your funds will also not be under undue risks. This is how we invest. How do you invest?

Written by Lawretta Egba