Why Should YOU Growth Invest?
So let’s start out by discussing what a growth stock even is. Basically, growth stocks are stocks that are expected to generate positive cash flow and earnings that are expected to grow at a faster rate compared to the majority of stocks in the market. Tech stocks tend to be great examples of growth stocks. For example, Apple, AAPL, is one of the best performing growth stocks in recent years. The stock has increased its net profit from about $53 billion a year in 2018 to about $76 billion in 2021. This is an enormous profit and with this, the company is expected to expand and grow at a faster rate than stocks that may be better value investments but are slower growing. In the long term, one could argue that if you pick the right growth stock, you will outperform the market by a wide margin and also be in the stock at a phenomenal price. From a value perspective, you would have the stock at that great price and the stock would be undervalued at the purchase price anyway. Also, strong growth stocks can offer great dividends that give you an additional cash return on your investment just for holding.
Now here’s where the problems begin for growth stocks. They may outperform the market and do great, but they can also well underperform the market and go bankrupt with no earnings and steep losses, causing the investor to lose everything. Having a good balance in your portfolio is one of the ways to mitigate these potential declines. Some of the stocks in your portfolio could be value investments such as traditional banks or insurance businesses while some of the stocks could be growth investments. Such investments like AAPL, MSFT, and AMZN have lots of money and are expected to grow at a relatively faster rate than the typical market however TSLA has earnings far less than these companies and carries substantial risk with government willingness to provide regulatory credits to keep Tesla at least at the bare minimum profitable. TSLA would seemingly be a riskier asset compared to AAPL or AMZN for that reason however, of course, we can’t predict the market.
So what’s the point? Growth investing can be a riskier business than some may believe and that’s why minimizing that risk is important. A diverse portfolio with dividend, value, and growth assets can be beneficial to reducing that risk but it’s up to the investor to decide.