In our current economic climate both savvy and new investors find it increasingly difficult to find the right blend of investments that they should hold in their portfolios. And let’s be honest, shopping for a new diet in a grocery store has far less complexity than to arrive at the right risk vs return balance when it comes to investments.
Although it should be said all investment strategies carry risk and even more so for people who don’t invest at all. For those of you who think the traditional savings account is a safe haven for your hard earned dollars, your buying power is eroded over time inevitably by rising inflation. That in itself is a risk that you are choosing to take.
Perhaps it’s time to take a fresh look at these two strategies. Think about where you as the investor would fit in, although you might dismiss it as being obvious.
Firstly investing for growth, this is an approach mainly focused on capital appreciation which means: you invest money in portfolios which purchase stocks of companies which exhibit signs of above average growth. You would of course in the short run see the ups and down that comes with this type of strategy. Based on past performance this would not only see you earn a healthier than average return on your investment, but real growth in the capital you invested.
Secondly investors seeking to make a nominal return would use an income based approach investing in funds centring on limiting the risk to capital.
These are both great strategies in their own right in an ever changing marketplace and should both have a place in your portfolio through the magic of DIVERSIFICATION.
However the question whether you should invest for growth or income would depend on a few factors, but being in a certain category should weigh you more to one or the other. The number one factor I want to talk about is Time or more specifically where you are in your Investment Cycle, this would be a huge reason for which strategy would yield the greatest benefit.
If you are a relatively young investor with fairly few commitments, you still have time to take some losses and ride out the market cycles. Investing for growth should be your inclination which is a much more effective way to invest and to maximise your capital gains. All else being equal, chasing returns during this stage in your investment cycle would be unwise to say the least as the investor for growth over time surpasses the investor seeking a higher yield in the short term.
On the other end of the scale, you have investors nearing the retirement period of their lives and during this period capital losses is not something they would necessarily be comfortable with, given that in most cases this being their only source of income. Investing for a steady yield would work best, providing a satisfactory income while guaranteeing that they will not have to start eating into their capital too early during this stage.
When you are a fledgling young adult, making an investment aimed at yield doesn’t make sense as you only have so much capital to truly profit from. This investment strategy would benefit a more mature candidate who is risk adverse with capital built up over time and can’t take advantage of the next rally in the market which is more attainable over the long term.
To summarize the above, you should style your investment strategy to the stage in your life. Doing some basic research, reading the Fund Factsheets and the name of the fund itself usually gives a clue as to what the funds aims to achieve and whether this falls in line with your investment objectives. As always remember to diversify and continually review and adjust your investments.
Andreas Shipanga is the Retail Business Development Consultant for OMIGNAM.