If you followed the guidebook, investing should be a clinical task. Like robots, we should all know exactly what style of investor we are.
If growth stocks are your thing, you’ll be constantly scanning the markets for the next hot sector. While income might be handy, what you’re really after is some decent capital growth.
You only need to look at some of the lithium stocks last year to see what growth is all about.
Having traded sideways for the previous two years, lithium producer Galaxy Resources Ltd [ASX:GXY] rallied hard into the end of 2015. Its share price jumped from around 15 cents in September, hitting 60 cents by the end of the year.
But that was only the start. By the end of 2017 Galaxy was trading at $2.60. More recently, it has traded over $4.
All the while, it hasn’t paid out a dividend…not a single cent.
However, I bet those that got in on that move — even part of it — won’t mind too much. With triple-digit returns over such a short space of time, missing some income action is the least of their worries.
However, timing is particularly crucial with growth investing. Some of those that got in on the lithium story too early lost their dough.
While Galaxy’s gain since the end of 2015 has been eye-watering, spare a thought for those that bought three or four years earlier. Those that held on watched the share price dive to just a fraction of its previous value.
It’s these kinds of price movements that another type of investor — so-called value investors — want to avoid. For them, a price gain like Galaxy’s is something they can only dream about. However, such big swings will keep them awake at night.
For value investors, it’s about running through a company’s numbers. They want steady, if unspectacular, growth.
Not everyone fits a box
However, the problem with classing investors into either style is that it’s too simplistic. Perhaps not even real. There are just too many investors with a foot in both camps.
Some buy companies for growth…hoping for the kinds of gains Galaxy has put out. While others are only on the lookout for income — though, of course, they won’t knock back some share price growth either.
To see where you fit — if anywhere at all — take a look through your own portfolio. Perhaps you’ve clearly thought out every holding. You know exactly why the stock is in there…and you have equal weighting across all shares.
Or maybe you have far less structure than that. Perhaps you own bank shares because you’ve always owned bank shares.
There might even be a few stocks that you bought on a whim.
Perhaps you were flicking through a paper and saw some broker’s tip. After reading a few paragraphs — and deciding from the photo that the chap looked sensible enough — you ploughed your money into the stock they were recommending.
Because we are not robots — and because many of us want both growth and value — many stock portfolios bear little resemblance to the way we are supposed to invest.
It’s unlikely that any of us would match the model portfolios put out by the brokers.
Why you need both growth and value
For those of us looking for income out of the stock market, it can be a trap to worry too much about investing styles.
Sure, many value stocks offer steady dividends and are not too expensive. That is, their share price might not trade at ridiculous multiples above what it earns.
However, there is a reason these stocks are cheap — the market does not believe the share price is going anywhere soon.
Of course, the market could be wrong. But the danger of investing only in these types of stocks is that the value of your holdings could slide if there is not enough growth. What you don’t want is for the market to leave you behind.
Sure enough, you’ll be earning income. But the income you’re generating might not make up for the loss in value (compared to the overall market) of a portfolio too weighted towards value stocks.
If the value of your shares go nowhere — falling behind the rate of inflation — you’re losing part of your purchasing power every day.
As an income investor, what you don’t want to do is become too obsessed with the yield. What might now seem like a poor yield might not be so in a few years if the company is growing at a rapid rate.
That’s why, if you’re an income investor, you also need to invest for growth.
All the best,
Editor, Total Income