Did you know that there are two main categories of investors? Some are more risky with their money, whilst others are more more risk-sensitive (perhaps!) Which are you?
When talking about defensive vs aggressive investors, they both have their merits as well as their drawbacks. There are hundreds of famous examples for both that rally millions of investors around their world to their cause!
So which are you?!
Defensive investing
Defensive investors are those who are more passive in their approach to stock investing (hence why they’re also known as passive investors!) Their main goal is to grow their net worth steadily through buying good companies at good prices.
Defensive investing is more relaxed. Defensive investors are often more likely to hold a small portfolio of companies or a small portfolio of real estate (or a small mixture of both!)
Defensive investors often have a 50-50 split in stocks and bonds according to legendary investor Benjamin Graham. However in the modern world, it could be as big as a 75-25 split in one direction.
Phil Town (author of Rule One Investing, a book that continues on Ben Graham’s philosophy of value investing!) is a major advocate of defensive investing in parts. (He supports being lax in your approach to investing, but refutes owning a high amount of bonds).
Generally, defensive investors aren’t looking to make more than average returns (although Phil Town believes they can!) Defensive investors also aren’t looking to make a major part of their income from investing either.
Pros
There are several reasons why people may want to be defensive investors. Some are forced upon them by external circumstances, others are chosen by them!
- They’re busy people and don’t have time to invest
- They want to minimize risk and/or loss
- Use it to invest for retirement
- More tax effective (minimizes capital gains tax)
- They invest in what they know- blue chip stocks
- They believe that past results will lead to future results
Aggressive investing
Aggressive investors are the exact opposite of defensive investors. Where defensive investors try to minimize their risk, aggressive investors take more risk. However they do not go with the idea to lose money.
In fact it’s the opposite! Aggressive investors often aim to use their risk to get above average returns each year.
Unlike defensive investors, and as a result of the aforementioned reasons, most aggressive invetsors aim to make most of their income from investing. As such, they often invest more often and in higher volumes to do this.
Famous aggressive investors often include: George Soros, Ray Dalio and Warren Buffett.
Despite the assumption that as aggressive investors make most of their money from investing, they must be traders. The presence of Warren Buffett on this disproves that, although he is a more defensive aggressive investor compared to the likes of Ray Dalio.
Unlike their defensive-investing counterparts, aggressive investors don’t believe that the past indicates the future. As such, they are often more optimistic about the future being bright (in terms of their stock portfolio!)
Also unlike their defensive counterparts, they don’t restrict what they can invest in. Where defensive investors may only invest in stocks, real estate and bonds, aggressive investors will invest in almost anything!
Aggressive investors will also continue to invest during a recession or market correction. This is unlike their defensive counterparts who will often refrain from investing during the recession or market correction!
Most financial advisers and hedge fund managers can be considered as aggressive investors. This is due to the fact that they need to get the most amount of money for their clients and thus themselves!
Much financial-based media, including Bloomberg and The Street are also aggressive investors. This is due to the fact that aggressive investors make up more of the market than passive investors do!
Pros
There are also many reasons why people become aggressive investors, including:
- Earn more money
- Passive investing doesn’t align with their goals
- They have too big of a portfolio
- They want/need to diversify
- More money to play with
- They favor the short term over the long term (not always however, in the case of Warren Buffett!)
Defensive vs aggressive investors: summary
Defensive and aggressive investors have their own reasons for being the type of investor they are. Many passive investors aren’t necessarily ‘not interested’ in investing, they merely are too busy to invest continuously and don’t want to hire a financial adviser to do it for them!
They’re usually the industry professionals (the ones who can afford to invest anyway!) The ones who spend so much time working that they can’t sit and focus on their finances for an hour, whether that’s investing, making a budget or what!
Aggressive investors on the other hand, aren’t madmen (usually!) They aren’t looking to lose money as one may think, based on the amount of risk they take on. Usually, they’re just like you!
They’re simply trying to make a bit of extra money on each and every deal!
Thibault’s views
As always, I will add my own personal views on this. As both a private and commercial investor I am rather torn. Originally, I started off as a passive investor- caring more about the addition to my net worth than the investing process myself!
However, as I got older and made the decision to become a commercial investor, I have become a more aggressive investor on the whole!
Had you asked me even five years ago- “Defensive vs aggressive investor- which would you consider yourself?” I would’ve probably told you that I considered myself a passive investor, even six months ago I would’ve said that!
However now I would respond that I was a very defensive aggressive investor- much the same as Warren Buffett. However this is mainly for my private investment portfolio.
For my clients, I am far more aggressive. Not because I don’t believe that I should be an aggressive investor for myself. But because my clients and I have different expectations- I am after long term value, my clients are often after short term value.
As such I switch between the two!
Personally, I prefer passive investing, however I understand that as my portfolio gets bigger I will probably have to get more aggressive!
Defensive vs aggressive investor- which are you now? Tell me in the comments!
