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Growth stocks, stock funds, bond funds, dividend stocks or target date funds – which one is right for you?
1. Growth stocks
Growth stocks are the sports cars of the stock investment world as they carry the promise of faster growth and higher investment returns. Growth stocks are typically in place for tech companies, but this is not a hard and fast rule. Generally, these companies plow their investments back into the business, so they will pay out regular dividends so long as their growth continues.
But they can also be a risky option for investors as the stocks carry a high price which is relative to the earnings of the company. So, when recession or bear markets arrive, these stocks are often the first to depreciate and can do so with scary speed. Nevertheless, growth stocks have been some of the best performing stocks of all times.
If you are interested in buying individual growth stocks, you will want to begin with research and analysis of the company and this can take some time to do right. And because these growth stocks are especially volatile, your portfolio will need to have a measure of high-risk resistance or the capacity to commit to these stocks for a minimum of 3 to 5 years.
Risk/reward: Growth stocks are among the riskier brands of stocks and largely because investors are ready to pay a lot for them. This means that when the bad times come, and they will come, the value of growth stocks can hit rock bottom fast. Having said this, some of the biggest names in the market — Facebook, Amazon and the Alphabets — are all high-growth companies and as you can see the potential for high rewards is there as well if you can land the right company.
Find out more about investing at the Bankers Investment Trust PLC – BNKR.
2. Stock funds
If you are not the type who has considerable time to make the effort of analyzing and researching your individual stock investments, then an ETF or mutual fund may be the best options for you. This involves buying a broadly diversified fund, which will allow you to invest in a variety of high-growth stocks and many other options as well. This adds a sort of safety net as you will be invested in a safer set of companies rather than just a couple of individual stocks.
This is a good idea for investors that are looking to take a more aggressive stance but don’t have the time it takes to make investing their life’s focus. Furthermore, by buying into the stock fund, you can get the weighted average return of many different companies in the fund and this is generally less volatile than placing all your hopes in just a few options.
If you were to buy into a fund that is not well diversified, like a fund that is only focused on a single industry, you may find your entire fund is affected by a single factor. For example, if the fund were focused on the auto industry a sudden change in oil prices could affect the performance of the entire fund.
Risk/reward: Stock funds are not quite as risky as funds for specific positions and they are less work as well. But they can still be unpredictable and lose or gain as much as 30% in a single year. This being said, these types of funds will be much less work to manage. Because you are owning a portion of more companies, and they are not all likely to excel or drop in a single year, your investment is more stable.
3. Bond funds
Bond funds can be mutual funds or ETF (Exchange Traded Fund) and contain a variety of bonds from several issuers. Bond funds are usually gathered into a specific type of fund. They can also be categorized by duration, riskiness, or the different types of issuers including corporate, federal government or municipality or other factors. If you are in the market for a bond fund there are plenty of choices for you.
Bonds can be issued by a government agency or a company, and the issuer will agree to pay the investor a specific amount of interest annually. The term of the bond comes to an end when it is redeemed and the issuer pays the investor the principal.
Bonds can be one of the “safer” forms of investment and they are even safer when they are part of a fund. This is because a fund can hold a variety of bonds of many different types from a wide variety of issuers. This diversifies the investment and lessens the likelihood that an extreme loss will impact the investor’s portfolio.
Risk/reward: Bonds can fluctuate just like any other investment, but bond funds have a much higher stability, but can be expected to move in accordance to the prevailing interest rates. Bonds are considered safe for the most part, but not all issuers are the same. Government issuers, especially those of the federal government are considered the safest of all. Corporate issuers can be risky to very risky depending on a variety of factors.
The return on a bond or bond fund is much less than what you would expect from a stock fund, maybe as much as 4% to 5% annually and less for government funds. But the advantage is that they are much less of a risk as well.
4. Dividend stocks
If growth stocks are the sports cars of the investment world, dividend stocks act more like a luxury sedan. They can certainly achieve those solid returns but are not likely to do so as fast as growth stocks.
Dividend stocks are those that pay off a dividend, or a regular cash payout. Many different stocks offer this option, but most often they are found among older companies that have a lower demand for cash. Dividend stocks are popular with older investors because they bring regular income and the best stocks will improve the dividends they provide over time. This means you can earn more than you can expect to earn with a fixed payout. One of the more common types of dividend bonds are called REITs.
Risk/reward: while dividend stocks have a tendency to be more stable and reliable than growth stocks, don’t assume they will not rise and fall. This is especially true if the market hits a rough patch. Nevertheless, a company that is paying dividends is going to be a mature company that is better established than your average growth company so this adds a measure of safety to the investment.
One of the big attractions of the dividend option is that they make a payout. Some of the better companies will make a payout of 2% to 3% annually and sometimes even more. But these payouts can be increased to about 8% to 10% for extended periods of time, this means you will typically see a pay raise, sometimes even annually.
5. Target-date funds
Target date funds are the best option for investors who don’t want to manage their portfolios themselves. These funds will become increasingly more conservative as time goes by. This means that your portfolio will become increasingly safer as you near retirement, when you will really need the money. These funds will slowly move your investments to more aggressive stocks to more conservative bonds as the date of retirement comes closer.
Target-date funds are one of the more popular options especially for those with a 401(K), even though they can be bought outside of those plans. You can pick the year you will retire and the fund takes care of everything else.
Risk/reward: This plan have many of the same risks that you will see with other stocks or bond funds. This is because basically, it is simply a combination of the two. If your target retirement date is still decades away, your fund will own a higher proportion of stocks and this means it will be a little more volatile at the beginning. As you get closer to your date, the proportion will be less stocks and more bonds, meaning it will be less volatile, so it will rise or fall less but also earn less.
Because a target-date fund will move gradually more toward bonds, it will gradually begin to perform less in the stock market. In other words, you will be sacrificing your returns for greater safety. And because bonds are not performing increasingly better, there is a chance that you will outlive your cash.
To avoid this, many financial advisors will recommend that you select a target date that is 5 to 10 years later than your actual date of retirement, this will mean you get extra growth from your stocks.
