Investing for Income vs Growth

In general terms, investing for growth aims to increase the value of the capital invested over time. Investing for Income targets a steady and sometimes rising stream of income, which can be paid out to investors, or re-invested if they choose, while seeking to maintain the value of the original sum paid in.

Value vs Growth Stocks

If you’re looking to invest in stocks, you’ve got two distinct options: value stocks and growth stocks. Now, which category is better? It all depends on the investor’s risk tolerance and time horizon.

Growth stocks, by definition, are considered stocks that have the potential to outperform the overall market over time because of their future potential. Found across all sectors, growth companies are viewed to have a good chance of significant expansion in the short- to mid-length timeframes – based on analyst insight of product performance or management capability.

Value stocks, on the other hand, are stocks that are currently traded below what they are actually worth – therefore, providing a superior return. The stocks are usually larger, well-established companies. To illustrate, the book value of a company’s stock may be $100 a share, based on the number of outstanding shares and capitalization. Today, if that stock is trading at $75 a share, many analysts would consider this to be a good value stock.

Best Growth and Income Mutual Funds in 2020

Growth investing is designed to help you build up a nest egg. Rather than looking for investments that provide a cash stream, the investor looks for investments that are likely to grow rapidly, and in turn boost their portfolio. The thing to remember about growth investments is that they are considered to have a higher risk than many income investments.

In contrast, with income investing, you are looking to create an income stream that can be used now to meet expenses. While there is the chance of loss with income investing, it is generally considered a smaller chance. Subsequently, the investments often have smaller returns but are usually more stable especially in times of market volatility.

Choosing the best investments for growth and income can be daunting. It is best to seek advice from a financial professional.

Portfolio for Income and Growth

Having a portfolio of both income and growth investments is common among people that have a moderate appetite for risk. This blended approach invests in both growth and value stocks as well as bond-like instruments. An income, growth, and value portfolio provides diversification – taking advantage of potential capital gains in the growth segment, as well as dividend income and stability of the value and bond segments. A blended portfolio is particularly attractive when the economy weakens.

The age of the investor is vital in determining how to invest for income or growth. As a rule of thumb, many financial professionals employ the investor age subtracted from 100 to derive the percentage of stocks they should hold (with the balance in bonds and cash).

Examples of Growth Stocks

As discussed above, growth stocks are generally riskier than other types of company stocks. However, with added risk comes a chance of a high return. Tech stocks like Amazon, Microsoft, and Facebook are good examples of growth stocks. These companies tend to reinvest all excess cash into their businesses and rely heavily on research and development of products that can be lucrative or quickly outdated.

Deciding whether to buy growth stocks, or which growth stocks to buy, requires you to consider your goals in life, your age, cash needs, tax situation, and how much risk you’re willing to take.

In summary, many people who are near retirement may be unsure if they have saved enough and are wondering what they can do to help ensure that their portfolio is structured to include the right balance of growth and income-producing assets.

In our blog post Why You Should Speak to an Income Specialist Today, you will be able to see just how well you are prepared and learn what you can do moving forward to help ensure your retirement is everything you want it to be.

Connect with an advisor in your area to find out if your retirement is on track.