Once you get serious about building your wealth, and I’m strongly suggesting that you do so as soon as possible, you will be confronted with choosing one of two different strategies. One of them will be looking at growth stocks and the other option will be building your portfolio with value stocks.
There are more than these two strategies in investing, but these are the most prominent categories that are used in investing on Wall Street. These categories were created several years ago to support the needs of customers whose investing styles are quite different from each other.
The people who normally selects growth stocks are looking at the companies that are highly visible in the news like Facebook, Apple, Amazon, Google, Yahoo and a few others. Their financial fundamentals are solid as these companies have a high growth rate in comparison to other companies in their industry. These companies’ products are being used heavily by the public and that is why they are considered growth stocks. Their products are primarily technology based and are labeled by the experts as such because they represent companies for the future.
The prices of growth stocks are traditionally higher than others and have a tendency to keep rising quickly because there is a strong demand for these progressive stocks. As a result, the large pension funds and other large institutional companies try to purchase these stocks as soon as they come to the market through an IPO (Initial Public Offering). You can make some big profits if you are lucky enough to buy these stocks in the early stages of the IPO, but this is difficult to do if you are not one of the preferred “rich” customers.
In reading this article up to this point, you would easily say that would I prefer to have growth stocks in my portfolio. However, as good as these growth stocks are, the stock market values of these securities can go up and down in big swings. As a result, not everyone has the stomach to endure this high volatility that comes with owning these stocks. You can be happy one day when the stock is rising and the next day you will feel terrible as these stocks can fall sharply, dropping the value of your portfolio.
Another point that you need to know about owning growth stocks and that is they rarely pay out dividends to their stockholders. These companies would rather reinvest their profits into research and development to expand the growth of the company. The stock owners of these firms don’t mind not receiving dividends as their long-range goal is to have capital appreciation and growth. This is one of the main reasons why so many aggressive investors want to own growth stocks.
Unlike that of growth stocks, the strategy of owning value stock is completely different. The companies that are labeled as value stocks, their goal is to provide steady income and market appreciation to their stockholders. These companies’ trading activity doesn’t move up or down quickly as the growth stocks since their main objective is to be a stable company. These companies pay out regular dividends to their stockholders and they have a track record of doing so consistently. Some of the more notable value stocks are, AT&T, Merck, General Motors, and Con Edison.
The investors that want to own value stocks are normally older individuals because receiving a steady dividend income is their primarily objective. These value stocks also have growth potential, but their goal is not to be a high flyer stock, but rather to be steady and consistent over time where the dividends will enhance their investment returns.
However, as we get older, our investment preference starts to change. Our viewpoint on the financial resources that we will need is different. As such, most investors would like to have a mix of different types of stocks in their portfolio. They have a couple of growth stocks and a few of value stocks in their portfolio. They will do so because this gives the opportunity for their investment to grow using both strategies. In having a mixed portfolio, your investment returns are normally smaller but also consistent. To the older investor, they prefer using this approach so that they can sleep comfortably at night.
The people who are unsure about what they should select for their portfolio normally leave it up to the professionals to choose for them. In this case, the choice of the professionals is to select a mixture of mutual funds for the client’s portfolio. The type of mutual funds that are purchased has growth and value characteristics, a blend that makes it a safer long-term investment. Since mutual funds represent a basket of stocks, their market values also don’t change much on a daily basis, but they are steady.
In using either strategy, at the end of the day, you want your portfolio to consist of stocks that represent your risk tolerance preference. Younger investors like to own the very aggressive growth stocks as they have time on their side when the market swings in both directions. More mature investors enjoy owning a collection of value stocks that along with dividends will increase significantly over time. However, in selecting the right stocks during this process you can build a sizeable portfolio that you will be very pleased to have later on.
Personally, I liked owning growth stocks when I was younger and now that I’m older, having a blended portfolio consisting of both growth and value stocks works best for me. I hope that reading this article helps you understand what investment strategy is best for you and helps you on your path of building wealth.