Learning the details of growth investing and value investing can help enhance your investment strategies.
If you’re interested in building wealth and are willing to be patient, investing is the way to go. It’s possible to go with different strategies when you invest, however. It can take some groundwork and some trial-and-error to arrive that a method that works for you.
Investors take one of two basic approaches — growth investing and value investing.
What is growth investing?
Growth investors aim to achieve higher-than-average earnings. They work to select stocks and funds that outperform average earners on the market. Often, the investments that they pick have a past of impressive growth, and the potential for future profit growth, as well.
If you’re able to find growth stocks and funds, you’re likely to see excellent returns and to be able to build up your portfolio relatively quickly.
The advantages of growth investing
Your assets grow fast: When you successfully identify growth stocks and bonds, you see your wealth increase at a rate faster than the rest of the market.
You have encouraging earnings growth: While earnings growth tends to drop in a recession, growth stocks tend to perform better than regular stocks.
You get to invest in emerging companies: Many growth stocks and bonds belong to small, upcoming companies. When you look for growth stocks, you’re likely to come upon a few such businesses. You’ll have a chance to be a part of something exciting.
The downside of growth investing
Growth assets can be volatile: Growth stocks and bonds tend to be subject to greater price fluctuations than well-established investments. While there is greater potential for growth, you do run the risk of coming by bigger losses, as well.
Growth stocks can be expensive: With the greater potential for growth, come higher prices. When you pay a premium to invest in growth stocks and bonds, you do so in the hope that your investments gain in value quickly enough to make the price of entry worthwhile.
Dividends tend to be rare: Growth companies need to expand. Rather than disburse their profits among their shareholders in the form of dividends, they tend to reinvest their resources in the company. Value appreciation, rather than dividends, is how you make money on these investments.
It’s important to consider both the upside of growth investments and the downside before you invest in them.
What is value investing?
A value investor attempts to identify stocks and bonds that are a great value: these tend to be assets from companies that have strong fundamentals, but that are underpriced at the moment, perhaps because of a short-term setback. In some cases, value stocks come from new companies that are underpriced because they haven’t received wide recognition at that point.
The advantages of value investing
You may find excellent deals: When you try to find stocks that are currently under the radar, you often succeed. Since value stocks are cheap stocks that have strong fundamentals, it is typically possible to see greater returns on investment with them, than with regular stocks.
They tend to not be risky: Value assets are often priced low because of temporary setbacks. If you can find an asset that’s priced low, you can be sure that it’s strong fundamentals keep it from falling further.
Steady gains are a possibility: Unlike growth investments, value investments tend to grow in value in a slow, if consistent way. Value-based investments are the method of choice for investors who favor a buy-and-hold approach.
The disadvantages of value investing
Value investing doesn’t usually lead to big profits: Value investing is well-suited to those who are interested in the long game. Value stocks tend to be stable, however. You aren’t likely to see your investments rise dramatically in value.
Value investments sometimes continue to remain depressed: Sometimes, stocks that seem undervalued are, in reality, correctly valued. Once you buy them, they continue to remain low, never appreciating.
It can take work to identify value stocks: While value stocks can be great investments once you find them, it can take work to get there. Research into a company’s fundamentals and history can take effort.
Growth investing or value investing — which is best?
It’s possible to build a sound investment plan with either investment method, depending on what your goals and investment style are.
If you wish to see your portfolio appreciate in a short period of time, growth stocks are your only option — value investing certainly won’t work for you. The reverse is true if you happen to have time on your hands.
Different investment strategies may be suitable at different times in an investment plan, as well. You may go with growth investments at the beginning of your career when you have time to make up any losses from growth investing. Then, you may switch to value investing as you approach retirement, when you no longer have time to recover, should losses occur.
Many investors choose to make use of both approaches at the same time. They allocate a portion of their capital to investing for growth and offset the risk involved by devoting the rest of their funds to value investing. Taking advantage of different investment strategies at the same time maybe the soundest plan of all.
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