When investing your money an investment adviser will always recommend a diversified portfolio so that you are not too exposed to any one sector, this is sound advice. Within the sectors it is also worth considering a mix of ‘growth’ and ‘value’ stocks. Growth stocks buy fast-growth companies with great prospects, the aim being that their future value will more than reward them for the price paid for the shares (they are more expensive) and they are expected to grow faster than the overall stock market. These growth stocks generally do not pay much in the way of dividends it is the stock price where the profit is made.
Value stocks, in contrast, trade at a discount to their real value, they are more of a bargain. The aim being that over time the companies are recognised as positive contributors and their share price as a result goes up because they become more sort after.
Growth stocks have performed very well over the last decade as new forms of media and technology have fundamentally changed the way we live our lives, companies like Facebook and Amazon are great examples of growth companies.
The strong run for growth stocks has been supported by a couple of things, loose monetary policy in the form of very low interest rates and quantitative easing.
A decade of loose monetary policy has encouraged risk-taking and particularly benefited growth companies by cutting financing costs. In recent years it is noticeable that tech and social media companies have benefitted using cheap financing to buy-back their own shares and, in so doing, support their share prices.
In recent months, markets have begun to increasingly focus on the prospect of a slowdown in global growth as the current economic cycle matures. There is no reason to believe that a global recession is imminent, however, during periods of slowing growth, when the future outlook is less certain, it favours value investment strategies. That’s because as doubt creeps in about the pace at which companies can continue to grow their revenues there is a greater focus on whether company valuations are fair.
When organic growth becomes tougher, businesses can also be inclined to pursue merger and acquisition opportunities instead, targeting companies that may be available at attractive valuations, with a view to improving profits through cost savings and restructurings.
Now may be a good time to re-evaluate your investment portfolio and make sure that you have sufficient diversification including a spread of value as well as growth stocks!
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