Why not to invest in growth stocks?
Generally, growth stocks are more expensive, as investors value them based on above-average past and, more so, future growth. However, they're also riskier, particularly because if a growth stock doesn't meet lofty expectations, the share price often drops considerably.
Since investors are paying a high price for a growth stock, based on expectation, if those expectations aren't realized growth stocks can see dramatic declines. Growth stocks typically don't pay dividends. Growth stocks are often put in contrast with value stocks.
For example, value stocks tend to outperform during bear markets and economic recessions, while growth stocks tend to excel during bull markets or periods of economic expansion. This factor should, therefore, be taken into account by shorter-term investors or those seeking to time the markets.
Investing in growth companies carries a moderate to high level of risk. Stock prices for growth companies are often high compared to the company's value. Yet, investors are often willing to pay these higher prices, even when the company is overvalued, because they believe the company has high growth potential.
If you need a regular stream of income, you should focus your portfolio on funds that will help you achieve this. If you have a longer investment time period, or you do not need an immediate income, you should think about a larger allocation to growth-focused funds.
- Volatility: Growth stocks can be more volatile than other types of investments, leading to greater short-term fluctuations.
- No dividend income: Investors seeking regular income through dividends may find growth stocks unsuitable.
- Risk: High valuations may not always materialise, leading to potential losses.
Finally, when it comes to overall long-term performance, there's no clear-cut winner between growth and value stocks. When economic conditions are good, growth stocks on average modestly outperform value stocks. During more difficult economic times, value stocks tend to hold up better.
One of Benjamin Graham's disciples was Warren Buffett, the most famous value investor of all time. Based on Graham's teachings, Buffett seeks out companies that are undervalued in the market but have solid business plans and can develop in the long run.
Advantages of Growth Stocks
Growth stocks are often less established than their dividend-paying counterparts, as they are plowing their profits back into their companies. Dividends paid will not be used to invest in expanding operations, developing new products, or making inroads in new markets.
High inflation has historically correlated with lower returns on equities. Value stocks tends to perform better than growth stocks in high inflation periods, and growth stocks tend to perform better during low inflation.
How risky are growth stocks?
Generally, growth stocks are more expensive, as investors value them based on above-average past and, more so, future growth. However, they're also riskier, particularly because if a growth stock doesn't meet lofty expectations, the share price often drops considerably.
While the product names and descriptions can often change, examples of high-risk investments include: Cryptoassets (also known as cryptos) Mini-bonds (sometimes called high interest return bonds) Land banking.
Growth stocks, in general, have the potential to perform better when interest rates are falling and company earnings are rising. However, they may also be the first to be punished when the economy is cooling.
Second, growth stocks have the potential to generate higher returns than value stocks over the long term. Finally, growth stocks are often more volatile than value stocks, which can allow investors to earn higher returns in a shorter time frame.
- DaVita Inc. ( ticker: DVA)
- DraftKings Inc. ( DKNG)
- Extra Space Storage Inc. ( EXR)
- First Solar Inc. ( FSLR)
- Gen Digital Inc. ( GEN)
- Microsoft Corp. ( MSFT)
- Nvidia Corp. ( NVDA)
- SoFi Technologies Inc. ( SOFI)
Options generally are a higher-risk, higher-reward opportunity than stocks. Investors considering them should know all their benefits and drawbacks.
| Stock | Expected Change in Stock Price* |
|---|---|
| Mastercard Inc. (MA) | 14.2% |
| Salesforce Inc. (CRM) | 7.2% |
| Advanced Micro Devices Inc. (AMD) | 11.3% |
| Intuit Inc. (INTU) | 11.1% |
We find reliable evidence that value stocks are riskier than growth stocks in bad times when the expected market risk premium is high, and to a lesser extent, growth stocks are riskier than value stocks in good times when the expected market risk premium is low.
A company that is still growing rapidly usually won't pay dividends because it wants to invest as much as possible into further growth. Mature firms that believe they can increase value by reinvesting their earnings will choose not to pay dividends.
Traditionally, growth investors focus on companies that increase their sales or earnings quickly, while value investors focus on stocks that trade at low valuation multiples. Buffett thinks value and growth are two variables in the same calculation, meaning investors shouldn't prioritize one over the other.
Will growth or value outperform in 2024?
We expect lackluster global earnings growth with downside for equities from current levels.” Against this backdrop, value stocks have a strong chance of outperforming their growth counterparts in 2024.
- Rule 1: Never lose money. This is considered by many to be Buffett's most important rule and is the foundation of his investment philosophy. ...
- Rule 2: Focus on the long term. ...
- Rule 3: Know what you're investing in.
Apple is Berkshire's largest public stock holding by far. Berkshire's $155 billion Apple stake is roughly four times larger than its second-largest holding. Buffett first bought Apple shares in the first quarter of 2016, and Apple's stock price is up more than 500% since the beginning of 2016.
“What we'd really like to do is buy great businesses,” he said. “If we could buy a company for $50 billion or $75 billion, $100 billion, we could do it.” “It would be easier to do with a private company,” he said.
It is possible to achieve financial freedom by living off dividends forever. That isn't to say it's easy, but it's possible. Those starting from nothing admittedly have a hard road to retirement-enabling passive income.
