Investing in 3D
It is the spectrum of investing from being passive to becoming active
NOWADAYS, the popular way of enjoying a movie is thru a 3D version. This is one way for the viewers to feel the thrill of the movie, more so, in an action movie. Especially the kids, they love that 3D eyeglass they will put on. It gives them that cool feeling.
Similarly, in investing, it is “cool” to know the 3D aspect of it. The three Ds of investing are delegating, deciding and directing. Essentially, these are the ways by which investors carry out their investment portfolio. Knowing the differences will help investors be clarified with their roles and responsibilities. It will help investors assess if they are improving their investing skills, too.
The first type of investing is delegating. Delegating investment is quite similar to passive investing. Investors get into a particular asset by delegating the responsibility to a professional or a financial institution. The common asset under this mode is a mutual fund or a unit investment trust fund or UITF. Investors literally delegate their decision to invest through professional fund managers who will do the selection of stocks and bonds to invest in. These professionals decide on the basis of its declared investment policies. They decide on which institution, brokers or banks to deal with. Investors simply select which fund suits them by reading its prospectus or seek the aid of a licensed advisor. Delegating is very helpful to those who are not so knowledgeable in investments or for those who may not have the time to watch the market regularly. Likewise, impulsive decision-makers are better off delegating their investments. Emotional and indecisive investors are the suitable candidates for a delegated investment.
Sadly, some passive investments in the past turned sour. One example is the traditional pre-need plans. Some investors who invested in its latter stage were hit. Investment scams that occasionally transpire is another example. So, how should one handle it? The next two modes of investing could provide some answer.
The sad state above gives rise to the second kind of investors, decision-makers. They like to know how their money is invested. They take risks despite limited knowledge and experience. Decision makers would like to take a bit of control on how their money is invested. This mode of investing is carried out on the basis of a recommendation or advice. Decision-makers subscribe to an external service that will help them decide on which investment to do. This kind of investor may not be totally naïve of the investment world. They may not have the time to make a research for themselves. So, they seek guidance from a person or an institution, who will recommend investment choices for a fee. Knowledge of investment is different from knowledge of a market. Decision-makers seek help from second party when dealing with a new market. Say, a local investor investing overseas. The need to be guided through an advisory service is of great help. However, it is also possible decision-makers may just be totally uninformed about investment and is relying solely to the services of an institution or an expert. They simply fully trust the recommendations expecting that their interests are served. They wish to know how their money is invested as their only way of controlling it. Moreover, they believe it is their way of learning the investment ropes when making the decisions by themselves.
Lastly, directing investors or self-directed investors are definitely well-informed and experienced. They have learned investment and know exactly the risks involved. They have a good grasp of the dynamics of the financial markets. They know the various assets and how to assess, get information, and which institution to deal with. They have gone through some formal learning. Nowadays, online trading of stocks and forex, qualify as self directed investing. Although some, rely on their brokers for some leads and analysis.
All told, the three types of investing may just be the hierarchy of investment approach from a novice to an advance type, to an expert mode. It is the spectrum of investing from being passive to becoming active. Life cycle suggests that young investors can be passive and later on in life, be decision-makers and self-directed investors. But, sometimes the opposite happens. Young investors tend to be aggressive and self-directed, while older people tend to be passive due to their heart condition. Whatever it may be for every investor out there, the good thing about it is that one is into investing.
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Ricky So is a Registered Financial Planner of RFP Philippines. HE is a independent Financial Adviser of Rampver Strategic Advisors, and a Columnist of Business Mirror.
Source: http://www.businessmirror.com.ph/index.php/en/business/banking-finance/33523-investing-in-3d
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