Index investing does very well in bull markets and very poorly in bear markets. I call this “lazy investing” although most investors have truly been misled that this is the best way to invest. Passive management produces average rates of return less expenses and fees.

Index investing is best for investors who lack the time, knowledge, or desire to invest time and effort into individual investment opportunities. There is nothing wrong with this choice, but it is a choice.

The Value Investing Investor

The Value Investor attempts to buy investment assets far enough below their intrinsic value as to provide a margin of safety. This requires hard work, research, and an ability to not let the culture tell you what to do. Therefore it is more difficult than it might appear.

The fact is most bear markets are preceded by excessive valuations. Most bull markets are preceded by bargain valuations. That is why investors need to have a flexible asset allocation that allows them to change their allocations based on the probability of success.
Value investing should not be confused with market timing. Some investors make investment allocation decisions based on charts, momentum, or various market indicators. This is called market timing.

Value investors make allocation decisions based on price and value. Some of us call this valuation timing. Purchasing assets for less than their real worth lowers risk and increases the probability of higher than average returns.

It also makes sense that purchasing assets for more than their real worth increases risk and decreases the probability of lower than average rates of return.

Which Type of Investor Are You?

Every investor should make a conscious choice in what type of investor they choose to be. Obviously, no one wants to be a buy high, sell low investor. Some investors make a rational decision to be an index investor due to their circumstances.

However, if you have the time and inclination, the market averages can be beaten! You can lower your risk by purchasing assets that are undervalued and selling assets when they become overpriced.

This article was republished with permission from Arbor Investment Planner.