The Wela team is big on income investing – buying stocks that pay dividends that can be reinvested to fuel portfolio growth, or taken during retirement to fund your chosen lifestyle. But we also know there’s more than one smart way to make money in the stock market.
Growth investing is one of those ways. It’s a powerful tool for investors who are willing and able to commit a portion of their portfolio for a very long term. This is the exact opposite of day trading or market timing. There is by definition no quick score in growth investing. But when a growth investment does pay off -- in its’ own sweet time -- it can be well worth the wait.
Growth stocks are shares in companies that are pouring every resource, including every dollar of profit, into expanding their product or service and generating more revenue. These are often companies offering new products or up-ending existing segments. They are battling to break through in the marketplace and/or make themselves indispensable to consumers. Two perfect examples are Amazon and Netflix. Both companies prioritize technological advancement and infrastructure expansion over profit in an effort to dominate their categories. Their success has driven the value of their shares upward over the past two decades.
Dividend stocks, on the flip side, are shares in more mature companies that are generating revenues well in excess of their costs and aren’t looking for the next big thing. Their products need only the occasional tweak (or clever new marketing) and their distribution systems are pretty well set. Proctor & Gamble, which owns such brands as Tide, Pampers, Charmin and Swiffer, is a perfect example of a growth stock. Coca-Cola is another.
Not every stock is so easy to categorize. The Walt Disney Company would seem like a dividend stock since it’s mature, operates in the established family entertainment sector, and pays dividends from its profits. But Kiplinger’s recently picked Disney as a promising growth stock, saying the company could exceed the average growth of publicly held companies thanks to its aggressiveness in getting into new aspects of entertainment. (And, maybe because billionaire genius Tony Stark, a.k.a. Iron Man, is now on their team.)
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 also provide nice some appreciation as the years roll by. But don’t go crazy with growth stocks – especially when you see them soaring. Volatility is part of the growth game – higher potential upside comes with higher risk of downside. Wild swings are part of the ride. Not long ago, Netflix, a growth company, saw its share value tumble 37% in just two months – and rebound 33% in two-and-a-half months. By comparison, during a recent rough patch, Procter & Gamble’s shares fell 17% over two months and took seven months to come back 20%
Every conversation you’ve ever heard in the break room about how much money some dude made or lost on a stock? That didn’t happen with shares of Ford or The Southern Company. It happened with growth stocks. And the reason he lost money was probably because he sold his shares when they were on a downward swing.
To repeat: A successful growth strategy is a long-term play. Choose companies with products or services you believe in – and hold onto those shares through the cyclical ups and downs, just as you would with your retirement accounts. Attempting to buy and sell these stocks based on their short-term movement will cost you money in either actual losses or in foregone profits from future appreciation of the stock.
A good way to capture the benefits of growth stocks is to invest in a growth fund like a technology ETF that owns shares in prominent hardware, software, and Internet companies. Buying a fund allows you to rely on expert analysis regarding what companies are most likely to deliver over the long term, and eliminates the stomach churning you are sure to experience if you own a handful of individual growth stocks.
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Disclosure: This information is provided to you as a resource for informational purposes only. It 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. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.