Most people who seek investment advice are within a few years of or just entered retirement. They often want to "fill the gap." This gap is the difference between the amount coming in—by way of Social Security, pensions, rental, and other income—and how much money they need each month to live the kind of life they want. Income investing helps them fill that gap.
Still, there’s more than 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.
- Your time horizon and appetite for risk are two major factors that will help you figure out if growth investing is right for you.
- Growth stocks are shares of companies that use all their profits to create more revenue, rather than give it out in the form of dividends.
- A person nearing or in retirement would not fit the profile for an allocation that is heavily weighted in growth stocks.
- Volatility is also part of the growth game. This higher potential upside comes with a higher risk of downside.
What Are Growth Stocks?
Growth investing can be a great way to get a high return. The keys are first to learn what growth stocks are and whether they’re the right investment for your unique circumstances. Your time horizon and appetite for risk are two major factors that will help you decide whether 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 are rising. On the flip side, they tend to underperform the market as stock prices are falling. Remember that past performance does not guarantee future results.
Growth companies are those companies that are generally looking for the next big thing—think Meta (formerly Facebook), Amazon, and Netflix.
Unlike growth stocks, dividend stocks are shares in more mature companies generating revenues well above their costs. They pay out a large part of their earnings in dividends to their shareholders. This can be very valuable if you need a steady stream of income right away. Dividend stocks are often household names like Procter & Gamble and Coca-Cola.
Is Growth Investing Right for You?
Growth stocks are best suited to investors with 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 even 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 who are willing and able to commit a portion of their portfolio for the long-term. If you decide to go this route, 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 to select companies with products or services you believe in. Be prepared to hold them throughout both the up and down markets.