Is Growth Investing Right for You?
The answer will depend on your time horizon and risk tolerance
A majority of people seeking investment advice are those who are within a few years of retirement, or perhaps they have just entered retirement. Their financial need often comes down to “filling the gap.” The gap is the difference between the income they have coming in—by way of Social Security, pensions, rental and other income—and the amount of money they need every month to live the kind of life that they want. Income investing helps fill that gap and gives retirees the peace of mind needed to sleep well at night.
However, there’s more than just one way to make money in the stock market. Depending on your time horizon and appetite for risk, growth investing may be one of those ways.
What Are Growth Stocks?
Growth investing can be a great way to provide investors with a high return, but the key is first to understand what growth stocks are and if they’re an appropriate investment given your specific circumstances. Your time horizon and appetite for risk will be two major factors that will help you determine if growth investing is right for you.
Growth stocks are shares of companies that use all of their earnings, resources, and profits to expand their products or services and generate more revenue. These are companies that—for the most part—do not distribute their earnings in the form of dividends to shareholders. Instead, they reinvest those earnings into the business. Growth stocks tend to do better than the overall market when stock prices, in general, are rising, but on the flip side, they tend to underperform the market as stock prices fall. Also, remember that past performance does not guarantee future results.
Growth companies are those companies that are generally looking for the next big thing - think Facebook, Amazon, and Netflix.
Unlike growth stocks, dividend stocks are shares in more mature companies generating revenues well above their costs. These companies pay out a large part of their earnings in dividends to the shareholders, which can be very valuable to investors that need a steady stream of income right away. Dividend stocks are generally those that are household names like Proctor & Gamble and Coca-Cola.
Is Growth Investing Suitable for You?
Growth stocks are most suitable for investors that have a long-term time horizon. Generally, a person nearing or in retirement would not fit the profile for an allocation that is heavily weighted in growth stocks due to both time and volatility. However, growth investments can help create a diversified portfolio when mixed in with dividend-paying stocks, international stocks, and maybe some bonds. The growth pieces can provide appreciation over the years. A younger investor with a longer time horizon and a higher tolerance for risk may be well-positioned to reap the benefits of a heavily weighted growth stock portfolio.
Growth investing is a powerful tool for investors willing and able to commit a portion of their portfolio for the long-term. If you decide to go this route, it's important to know that by definition, there will be no quick score. Growth investing is the exact opposite of day trading or market timing. Volatility is also part of the growth game – a higher potential upside comes with a higher risk of downside.
A successful growth strategy is a long-term play. Be sure that you select companies with products or services that you believe in and be prepared to hold them throughout both the up and down market cycles.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.