Investor Type 1: Pre-Investor
Unless you were born with a silver spoon in your mouth and a trust fund to match, then you likely began life as most of us do: a pre-investor.
A pre-investor is simply someone who isn’t investing.
Pre-investors are characterized by minimal financial consciousness or awareness. There’s little thought of investing, and there’s correspondingly little savings or investment to show for that minimal thought.
Some pre-investors have a company retirement plan, but that wouldn’t exist had the personnel department not set it up for them.
“The trouble with being poor is that it takes up all your time.”– Willem de Kooning
The pre-investor’s financial world is primarily about consumption, which takes precedence over savings and investment.
As wage earners, they typically live paycheck to paycheck believing their financial difficulties will be solved by the next pay increase. When pre-investors earn more, they spend more, because lifestyle is more important than financial security.
For whatever reason, pre-investors haven’t woken up to the necessity of owning financial responsibility for their lives and their future.
This isn’t to judge all pre-investors harshly because it’s perfectly acceptable for a seven year old to live in this reality. It’s another thing for a 40 year old to never graduate beyond it.
Are you a pre-investor? How is your savings and investment plan progressing? Is your financial consciousness ruled by consumption needs, or are you prioritizing savings and investment?
Investor Type 2: Passive Investment Strategy
As we mature and gain responsibility, most people graduate from pre-investor status and enter the investment world through the window of passive investing. It’s the most common starting point on the road to financial security.
“Whenever you find that you are on the side of the majority, it is time to reform.”– Mark Twain
Most financial institutions, educational services, and web sites support passive investing as the proven, accepted solution. Most of what you can learn from the information available in your local bookstore or on the internet is the conventional wisdom of passive investment strategies.
Passive investing is where the retail world of investing lives. While there are no hard statistics to support my claim, I believe well over 90% of all investors fall into the passive investor category.
The passive investor type usually employs all the basics of sound personal financial planning: own your own home, fund tax deferred retirement plans, asset allocation, and save at least 10% of earnings.
If you follow these foundational principles and begin early enough in life, then passive investing is likely all you’ll ever need to attain financial security.
Investor Type 3: Active Investor
Active investors build on the foundation of the passive investor. They take the process to the next level by running their wealth like a business.
The primary difference between active and passive investors is the active investor not only receives market based passive returns, but he also gains a value-added return stream based on skill; two sources of return in one investment.
This allows the active investor to make money regardless of market conditions or direction and to reduce losses during periods of adversity. This holds the potential to increase returns and lower risk.
“By the time we’ve made it, we’ve had it.”– Malcolm Forbes
A primary distinction between passive and active investment strategies is passive investors work hard to acquire and save money, but spend far less energy making their money work for them.
Active investors work just as hard at making their money work for them as they ever did earning it in the first place. In other words, active investing is more work, and that’s why it is not for everyone.