Having everything balanced in life is usually a good thing, whether that’s your bank account being positively balanced, having a good work / life balance, or just being able to maintain your balance on the way back from a night out!  In this article we give a balanced perspective on your investments as we take a look at growth investments and the stocks available for your long term strategy.  This balances nicely with our feature back in August where we discussed how income investments work in your portfolio.

According to Investopedia, the definition of ‘Growth Investing‘ is a strategy whereby an investor seeks out stocks that are deemed to have good growth potential. In most cases a growth stock is defined as a company whose earnings are expected to grow at an above-average rate compared to its industry or the overall market.

Understanding Growth Investments

Growth stocks and funds are investments companies that are expected to experience a faster than average growth based on their revenues, earnings, or cash flow. Investors and fund managers will also look at the way a company manages its business, such as whether or not they are more likely to reinvest profits into the business for expansion or on acquiring other businesses, as opposed to using them to pay dividends to shareholders.

Growth investments generally offer the potential for higher returns on your capital, but adversely they are also seen as a higher risk investment too.  So, whether or not you use them as part of your long-term strategy will ultimately depend on your individual risk appetite.

They are also more likely to perform better than the overall market when stock prices in general are rising.  However, they also likely to underperform the market when stock prices fall, so it’s important to remember that past performance does not guarantee future results.

For an investment to be categorised as a growth investment it will;

  • not to have a maturity date, which is where you know when capital will be returned to you
  • not to have a regular payment of income that is legally enforceable by the investor
  • not to have any guarantees by the issuer on the monies invested

A growth investment may or may not pay an annual income, but the payment is at the discretion of the issuer and, as such, the investment’s annual income payments can be increased, decreased, or eliminated at the issuer’s discretion.

There are several different types of growth investments:

Growth vs Value

When looking at growth investments it is also worthwhile understanding the difference between them and value investments.  Value investors actively look for stocks which they believe are undervalued in the investment markets. This may be because they feel that the market has over-reacted to good or bad news therefore resulting in stock price movements that may not generally correspond with the company’s long-term goals and ambitions. This means that investors are potentially able to profit from buying these stocks when their share price is low.

Again, these investments are likely to be much higher risk than some other investment vehicles, so your long term strategy and your risk profile will play a key part as to whether or not these investments will be suitable for your portfolio.

How do you decide what growth investments are right for your portfolio?

At Bridge, we work with clients to understand their investment goals and what they want to achieve.  Having your strategy in place and planning your investments to match that strategy, alongside understanding what level of risk you are willing to take with your money should always be your first step.

Ideally, investors looking for growth in their portfolio will be want to invest in high quality and low risk stocks that can provide them with strong steady growth over the medium to long-term.  The quality of a company can be assessed by using credit ratings such as Morningstar’s moat ratings, Value Line’s or S&P’s quality grades or; on metrics like earnings and revenue growth rates, their business model, debt levels, and so on.

Taking specialist advice before deciding what investments are right for your circumstances is always recommended, particularly when considering those that are deemed higher risk.

The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice.

Angus Kirk

Financial Planner at Bridge Investments
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