There are two common investing strategies: investing for growth or investing for income. There are also investments that provide both growth and income. Learn more about which investing strategy is right for your goals.
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How is investing for income different from investing for growth?
Income investments pay out dividends or interest to the investor based on a set schedule. Growth investments focus on growing the original investment as much as possible — usually through compound interest over time.
For your investing plan, it’s important to know what types of investments you have in your portfolio, the length of time you have to reach your financial goals (your time horizon), and how much risk you can handle.
How to invest for income
An income investing strategy aims to build a portfolio which will generate regular income for you. This typically involves a combination of investments of different asset classes and types.
Before you choose a specific income investment, get the answers to these four questions.
1. How much risk is involved?
Some income investments are considered low-risk. They guarantee you’ll earn some income. These include:
Other income investments, such as preferred shares — a kind of stock — may grow in value as well as provide income. Preferred stock offers regular income through dividends, as well as the potential for growth through rising share prices.
There is always a risk that stocks can also lose value. And the income stream isn’t guaranteed as it is with low-risk income investments.
2. How much income will you get?
With many lower-risk investments, your income will depend on the interest rate. Savings accounts, GICs, and bonds usually increase in value through their interest rates. For other investments, such as stocks, mutual funds or ETFs, your income may be generated through dividends, interest payments or capital gains. This is usually done on a quarterly basis or other scheduled timing.
Usually, the longer you invest in one of these income products, the more you make. But this isn’t always the case.
3. When can you take your money out?
If you may need quick access to your money, you likely won’t want an investment that locks in your money until a set date. For example, some guaranteed investment certificates (GICs) lock in your savings. Others let you cash in any time, but you pay a penalty for taking your money out early.
4. Are there any fees?
Some investments that pay interest don’t charge fees when you buy. Others do. Find out if there are any account fees and other costs.
How to invest for growth
A growth investment strategy is focused on increasing the overall value of your investments. You can make money by buying at one price and selling at a higher price in the future.
This kind of strategy is often used when investing in stocks. The growth-oriented investor tends to seek stocks from companies or sectors which are expected to perform well in the future. This might be because they are new companies expected to grow, or because they are part of a sector which is growing as a whole.
However, these kinds of investments can also lose value, which makes them risky. In addition to stocks, growth investments can include equity mutual funds and ETFs.
If you’re investing for growth, you may wish to consider one of the following approaches. Ultimately your strategy should make sense for your goals and your level of risk tolerance.
1. Value investing
This involves picking high-quality companies that seem to be undervalued because they cost less than similar companies in the same industry.
2. Investing in growth
This involves picking companies that keep all their earnings to invest in growing their business. The stock may be expensive today, but growth investors believe that the company’s future growth will help the stock continue to go up in price.
3. Index investing
This means investing in a group of stocks that behave like a particular market index. You can make your own picks or buy units of an index mutual fund or index ETF.
4. Top-down investing
With this approach, investors first look at the overall economy to find out where there are strengths and opportunities. They pick the industries or sectors that will most likely perform well. Then they choose stocks with the greatest growth potential within those industries or sectors.
5. Bottom-up investing
This involves using financial ratios and other indicators to pick stocks based on a company’s basic strengths, including its management team. Bottom-up investors hope a stock can perform well even if its industry or the economy is not doing well.
If you’re considering taking a growth investing approach, read more about 3 ways to evaluate companies when investing in stocks.
How to invest for both growth and income
It is possible to invest for both income and growth at the same time. There are some investments that create a steady stream of income and have the potential to go up in value. They are considered to have higher risk because many of them do not guarantee an income and may also go down in value.
Growth and income investments include:
Some mutual funds and exchange-traded funds (ETFs) are managed with both growth and income strategies in mind. Others are focused on one strategy more than the other. As a result, it’s important to understand the management strategy involved in the investments you’re buying, and not just the type of investment.
If you’re not sure what strategy is right for you, it may help to meet with a financial advisor who can help you.
Summary
There are different types of investing strategies for growth, income or both. Be sure to understand each before adding them to your portfolio:
- Income investing – has the goal of providing regular income on a quarterly or monthly basis.
- Growth investing – has the goal of increasing the value of an investor’s portfolio.
- Growth and income investing – tends to be higher risk. Many of these investments don’t guarantee an income and they can go down in value.
Any investment strategy has some risk. Your investments can increase in value but can also decrease. Whatever you choose to invest in, make sure you know the fees associated with each product.
