Sometimes it can be difficult to decide whether you should be a growth investor or an income investor.
Both growth and income strategies have their benefits, and one isn’t necessarily better than the other.
Here I take a look at what growth and income investing actually are and which one you should choose.
What is Growth Investing
The idea of growth investing is to buy assets that are expected to appreciate in value.
So, for example, if you buy stocks from aggressive growth companies, you’re not expecting dividends but rather rising stock prices as the companies grow.
It’s simply because growth companies usually reinvest profits to grow their businesses, they don’t normally pay a high dividend.
As you can guess, growth investing is a long-term investment strategy because growth takes time.
What is Income Investing
The main goal in income investing is not to expect the assets to greatly increase value, but to receive steady income right away.
Depending on your investment goals, you can either reinvest your income or spend it how you please.
As opposed to growth investments, income investments don’t necessarily need to be long-term investments since they usually pay interest or dividends right away.
How to Invest for Growth
Individual growth stocks. The most common way to invest in growth is to buy growth stocks. They can be extremely volatile but also highly profitable investments. The tricky part is that it’s essential that you pick the right stocks – not all companies make it.
It’s also worth noting that most aggressively growing companies tend to have high valuations. What it means is that a lot of the future growth is already priced in the stock.
If the company fails to grow as expected, the stock price can plummet.
Start-ups and private businesses. You can think of start-ups and private businesses as publicly traded growth companies on steroids. The risk level is through the roof, but if you happen to come across a gem of a company, you can expect extraordinary results.
The problem is that these types of investments can require a substantial amount of capital, which makes them unavailable for most investors.
ETFs (Exchange Traded Funds). Growth ETFs are funds that include companies growing faster than the average growth rate. There are a lot of different growth ETFs, but what’s common to them is that they usually have low dividend yields and high valuation ratios.
Growth ETFs shouldn’t be mixed with value ETFs. Although both growth and value investing are based on the premise that the stock price should rise, they are two different things.
In value investing, you look for underpriced companies that can very well be slow-growing and established dividend companies, for example. Growth investing focuses purely on companies that are, well, growing.
How to Invest for Income
Bonds. Most people associate fixed income investments with bond investments. Be it corporate, government, municipal bonds, or whatever, they all share the same idea – you lend money to someone, and they pay it back with interest.
While there are some bonds, like high-yield (or junk) bonds that can carry a lot of risk, most bond investments are considered to be low-risk investments.
One of the most common practices in investing is to mix stock investments and bond investments to balance risk. Interest income is one of the most reliable kinds of income, which makes it a great way to reduce your overall portfolio risk.
High-Yield Savings Accounts. A high-yield savings account works in the same way as a normal savings account, except it usually pays a higher interest. While there might be some restrictions to withdrawing your money for a set period of time, they’re usually protected against losses.
It’s worth noting that during periods of low interest, it may be difficult to find a high-yield savings account with an adequate interest rate. Theoretically, the interest you get should exceed the inflation rate. In other words, the real return should be positive.
REITs. REITs, or Real Estate Investment Trusts, are simply companies that own different kinds of real estate – usually residential or commercial properties.
REITs are also required by law to pay 90% of their profits out, so if a REIT makes a profit, you’re obligated to receive your share. So, what this means is that you don’t have to worry about dividend policies.
Dividend Stocks. Most income investors are familiar with dividend stocks, or in other words, stocks that have a high dividend yield. These are companies that have grown from the fast-growth phase to a more stable state and don’t need to reinvest all their income back into their business.
For stock investors, high-dividend-paying stocks are usually the number one choice for income investments.
ETFs. As there are growth-oriented funds, so there are income-oriented ones. These would usually be high-yield bond ETFs or high-dividend ETFs. In other words, funds that invest in high-interest bonds or companies with high dividend yields. They can also include REIT funds.
As you can guess, the biggest difference between growth and income funds is that income funds have higher dividend yields. It’s also worth noting that growth funds usually have higher valuations than income funds.
Which One Should You Choose
It may be difficult to choose between growth and income investments because they both have their benefits.
When thinking about which one is right for you, there are a couple of factors to consider:
Investing Strategy. Different investors have different goals (insightful, I know). If the idea is to get accumulate wealth aggressively rather than maintain it, growth investments can offer just that.
Then again, if your strategy is to maintain wealth or accumulate it slowly but steadily through interest or dividends, income investments are a more suitable choice.
Risk Tolerance. It’s essential to define risk your risk profile correctly before deciding what to invest in.
Overall, growth investments tend to carry more risk than income investments. The more risk you’re willing to take, the more growth investments you can have.
Income investments, on the other hand, can be considerably low-risk investments, which makes them great investments for money you can’t afford to lose.
Financial Situation. If you have a strong financial status and no need for additional income at the moment, then you can invest heavily in growth investments.
Then again, if you wish to receive regular income to pay for living expenses and whatnot, income investments are probably the right choice.
A rule of thumb is that the riskier investments you make, the more stable your financial status should be.
Time Horizon. If the idea is to invest money for a year or two, then it’s better to consider low-risk income investments.
Growing companies require a long time to grow, which is why growth investing also requires a long time horizon.
Moreover, the growth can be an extremely volatile one, so it’s always preferable that you’re not obligated to sell your holdings unless you really want to.
Can You Choose Both Income and Growth Investments
Yes, you most definitely can take the best of both worlds.
Depending on your investment strategy and risk tolerance, combining growth and income investing can be a very lucrative choice.
If you invest in individual stocks, it’s not a bad idea to have both growth and dividend companies in your portfolio. You can use stable dividend companies to balance your overall portfolio risk. Also, a great way to diversify is owning both growth and income funds.
The idea of having both growth and income investments is that you have some passive and growing income right away from dividend stocks, and asset appreciation from growth stocks. No matter what kind of investment strategy you have, there’s undoubtedly both growth and income fund for it.
You can also balance your risk level by using lower risk investments like corporate and government bonds.
Adjust Your Portfolio
What works for you today, doesn’t necessarily work so well tomorrow.
One of the greatest things about investing is that you don’t need to make permanent choices. If you’ve started out as a growth investor and realize it feels too risky for you, nothing is stopping you from balancing your portfolio towards income investments.
An investment portfolio is a living, breathing thing that evolves throughout your life.
When we’re young, we can get by with our salaries and can use the rest for investing. As we get older and retire, we need more income to support our lifestyle.
There’s usually a clear shift from growth investing to income investing when people get on in years.
It’s important to realize that accumulating wealth and keeping it are two different things.
To gain real wealth through investing, you need to take on more risk. Once you’ve managed to accumulate wealth, you don’t need to take so much risk to keep it.
Summary
So, to summarize, whether you should be an income or growth investor depends on your risk tolerance, financial goals and situation, investment strategy, and time horizon.
If you can handle more risk, have a long-term investing horizon, and have a stable financial situation, you can very well become a growth investor.
Then again, if you don’t want to take on a lot of risk, only plan to invest for a couple of years, and can’t afford to lose your money, you might want to consider income investing.
You can also choose both by investing a certain portion of your portfolio in income investments and a portion in growth investments.
Even if you’d started out as a high-risk growth investor, you can rebalance and adjust your portfolio anytime.
