Understanding Investment Style and The Use Of Style Boxes

The term “Investment Style” has to do with everything that defines how you invest. In order for fund managers to determine the best combination of investment and investment styles, many of them use a tool known as a style box.

“What’s your style?” is a simply way of asking how you get things done or what you like. While it is a relatively easy concept when it comes to fashion or your brand of cars, it is a whole new ball game when investing in the stock market (or anywhere else) is concerned.

Off the top of your head, you might assume you are a bold investor willing to take risks to possibly make massive gains. However, it could take your first huge loss to realize you’ll rather have all your funds intact.

The term “Investment Style” has to do with everything that defines how you invest. It talks about your philosophy when it comes to investing and it naturally is made up of tons of characteristics.

While your zodiac sign might not be a trusted way to determine the kind of person you are, there are various personality traits that link investors to their true investment styles.

This could include the previously held beliefs of the investor, his or her temper, social traits like gender, income level / wealth profile, family, etc. In other words, it could really just be tied to the kind of person you are.

The very nature of the investments you make like bonds, financial derivatives, real estate, or equity investments is a pointer to your investment style. It also covers things such as the size or market capitalization of the companies you invest in, whether you are active or passive, the value you seek to attract, juxtaposed to the value (financial) that you place on the table.

Your degree of diversification across asset classes, industries, and countries also plays a huge role as well.

Your investment style is what is ultimately followed by an investor or money manager when it comes to selecting investments in a portfolio. Your investment style is used to create your investment mandate and this is what guides the fund manager in making investments based on what to add to an investor’s investment portfolio.

How Style Boxes Help

In order for fund managers to determine the best combination of investment and investment styles, many of them use a tool known as a style box. A style box is a mutual fund classification tool by Morningstar, Inc. – a financial analysis firm.

This tool helps them have a virtual representation of the investment characteristics of risky assets versus less risky assets primarily between stocks and mutual funds.

Based on your characteristics or investment style, the fund manager uses this tool as a checklist for apportioning investments into both fixed-income and equity investments. To use this, securities are classified into categories such as large value, large blend, and large growth for large, medium, and small levels.

Style boxes aid the investor’s understanding of money management and the asset allocation of the investor’s investment portfolio and it is their own way of using your style to build good investment portfolios.

Written by Lawretta Egba.