But are these labels useful for retail investors? When starting an investment journey, is it worth choosing and sticking to an investment style, or can you change along the way? Or is it better to be style-agnostic and have no label?

ASX Investor Update asked four financial experts about the value of investing styles and how new investors should approach this issue.

Their response was unanimous. Before worrying about investment labels or styles, investors should first understand their investment goals, risk tolerance and timeframe. Then, identify the right investment style for them. 

“The aim should be to use an investment style aligned with your financial goals and preferences,” says Australian Shareholders’ Association CEO Rachel Waterhouse. “Having an over-arching financial strategy and diversified portfolio is more important that focussing on a particular investment style.”

In another hypothetical example, a retired couple favours income investing. They may seek listed assets that have more reliable dividends that can help fund their living costs. They are risk averse, and may prefer a more conservative investing style.

Waterhouse cautions against following investment stereotypes that rely on age. “We often assume new investors are younger and use a growth style. At the ASA, we’re seeing more first-time investors who are widowed or divorced later in life. The investment style they need might be different to other first-time investors.”

Waterhouse makes a telling point. “Every investor is different. A style that works for one investor might not suit another. That’s why it’s a good idea to seek financial advice or do further research of your own when choosing an investment style”.  

Avoiding market “noise” on investment styles is also important, says Waterhouse. “When you start investing, lots of people tell you to invest this way or that – and that their style is the best way. There’s no magic, winning formula.”
 

Understanding labels 

Shani Jayamanne, Senior Investment Specialist at Morningstar Australia, says investors should recognise that investment labels are industry-created terms.

“Classifying asset managers according to their investment style helps the industry compare returns from different funds and whether a style is outperforming or underperforming at a point in time. That is less relevant for retail investors.”

Jayamanne believes that sticking rigidly to a particular investment style is unsustainable for most retail investors. “It can potentially create the wrong mindset and encourage poor investment behaviours. It’s more important to focus on your financial goals rather than be swayed by industry labels or styles.”

Blending different investment styles is a feature of core-satellite portfolios. Here, the portfolio might use index investments in its core to deliver the market return, and active investments, such as direct shares and active funds, as portfolio satellites to potentially deliver excess returns and reduce portfolio risk. 

Investment labels can also be fluid, says Jayamanne. “A company might be viewed as a growth asset as it reinvests more of its earnings to fund future growth. “As the company becomes larger, and its growth slows, it pays out more of its earnings through dividends, so is now viewed as an income stock.”

Jayamanne raises an important point. Investment labels often depend on one’s perspective of an investing style. A so-called “growth stock” on a high Price Earnings (PE) ratio might offer outstanding value if the market underestimates the company’s growth potential. 

Conversely, a so-called “value stock” could have stronger growth prospects than the market realises. Investment labels are never as clearcut as they seem.

Is picking a style worth it?

Stockspot CEO Chris Brycki says investment styles can come in and out of favour during market cycles. “The problem with picking a style is that it can be out-of-favour for a long time and potentially lead to poor portfolio returns.”

Brycki says retail investors may consider using funds that combine different investment styles, rather than sticking with one style. For example, an investor may use Exchange Traded Funds that aim to replicate the return of an underlying index.

Like all investments, ETFs have potential benefits and risks. By investing in a basket of securities, index funds quoted on ASX can provide instant diversification at lower cost. Because index ETFs aim to deliver the market return, they can also potentially deliver negative returns if the index they track falls that year. 

Investing in ETFs has information on the features, benefits and risks of ETFs. The free ASX online ETF course is another way to learn about ETF basics.

Brycki says owning an ETF that tracks an index, such as the S&P/ASX 300 Index, means owning an asset that provides exposure to a mix of investment styles. “In theory, owning an index means having more exposure to investment styles that are currently in favour, and less exposure to styles that are out-of-favour,” he says.

Diversification of investment styles does not guarantee investment success or risk reduction. But Brycki’s broader point about using index ETFs to potentially enhance portfolio diversification – by providing exposure to different stocks and investing styles – could be a consideration for new investors.

The value in understanding labels

Although experts are wary of rigidly following investment styles, they recognise the importance of having a basic understanding of key styles.

Future Generation CEO Caroline Gurney likens this to buying groceries. “When we shop at the supermarket, we often look at the food label before putting something into the trolley. It’s a bit like that with investing. New investors need to be able to look at the ‘label’ of a fund and determine if it’s right for their needs.”

Gurney is passionate about new investors allocating more time to develop their financial knowledge. “We spend so much time on other aspects of our life, yet often neglect our finances. New investors don’t need to spend days on this, just commit to a bit of time here and there to learn the basics, such as investing styles. There’s a lot of quality free information on finance education available online.”

Like other experts interviewed for this article. Gurney stresses the importance of understanding your financial goals, risk tolerance and time frame before choosing an investment style – and being flexible with these styles. 

“Ultimately, it comes down to how well you understand your financial self and where you want to get to,” she says. “Once you know that, decisions about different investing styles make a lot more sense.”

Key terms

• Growth investing: Focuses on selecting stocks or other financial assets that are expected to grow at an above-average rate compared to others in the market. As a general rule, growth stocks typically trade on higher valuation multiples, deliver more of their total return through capital growth rather than income, and are considered to offer higher potential returns with accompanying higher risk. 
  
  
• Value investing: Aims to identify and invest in stocks or other assets that may be undervalued by the market. Value investors seek to invest in securities that they believe are trading below their intrinsic, or true, value. As a general rule, key traits of value investing include owning stocks on lower valuation multiples, and seeking a higher “margin of safety” by identifying stocks that are potentially worth more than their current market price. Value investing can involve buying out-of-favour assets and adopting a “contrarian” approach.
  
  
• Income investing: Focuses on generating a steady stream of income from an investment portfolio, typically through dividends, interest payments, or other forms of regular cash flow. As a general rule, income investing tends to favour assets like stocks, bonds, property or other income-generating assets. Income investors tend to seek more stable, reliable returns and may have a more risk-averse approach.