There are many different types of investors, who all choose to invest in endless different ways, but the two main categories are defensive and offensive investors.
- The defensive investor is most often a not so skilled investor who prefers safety and lower potential profits over risks and higher potential profits;
- The offensive investor is most often a more skilled investor who prefers risks and higher potential profits over safety and lower potential profits;
There can be professional investors who just choose to invest in a defensive way, like investing in index funds for example. This is safe and not time consuming.
There can also be professional investors who invest in an offensive way, but calculate their risks versus their potential rewards. For every Dollar that they could earn, they can only lose one third for example. This is called “asymmetric risk/reward”, where the potential upside is much bigger than the potential downside.
Benjamin Graham has written an investing handbook called The Intelligent Investor, which is a perfect way for new investors to start their journey to financial freedom.
In this book Benjamin Graham will go into detail about the differences between defensive and offensive investors, and in which ways they should invest.
We will explain these differences in short and in our own way.
This is what we recommend to all investors:
- The foundation of an investment portfolio starts with (monthly) investments in one or some different index funds. We live in Sweden, and we invest in one global index fund, a Swedish index fund, and an “emerging markets” index fund. You could see this as long-term investing for your pension, since index funds compound gradually over time;
- The next step would be to accumulate more knowledge about investing in general. Start with index funds, than learn more about stocks, bonds, cryptocurrencies, commodities, and all of the other investment classes available;
- In other words, start as a defensive investor, and play safe and certain. The results are pretty good anyways. As you gain more knowledge about investing, you can become more of an aggressive investor, who knows which stocks, bonds, cryptocurrencies and commodities to buy and when to buy them exactly;
Why we highly recommend you to start defensive and invest 10% of your monthly salary in index funds is because the costs of index funds are extremely low. These index funds represent the whole market, so basically you spread your investment over the whole market. You get what the market performs, which is around an 8% annual compounding profit. It costs little knowledge and little time as well!
You will learn more about index funds, stock, bonds, cryptocurrencies, commodities, and all other investment classes in chapter 2. Investment Classes.
We also highly recommend you to buy some books about investing and learn from the professionals first, all of which you can find in chapter 4.1. Books.