Any good investment strategy requires diversification. One way you can do this is to assess your stock portfolio for growth stocks and value stocks, and the proportions of each. Understanding the difference between the two is especially important for effective financial planning and reaching your financial goals. Few people these days can reach their retirement goals without some sort of investment, and understanding the difference between types of stocks can be very helpful.
A certain amount of your stock portfolio should include growth stocks. How big a percentage depends upon your risk tolerance. If you can handle a great deal of risk, you can invest in more growth stocks. If your risk tolerance is low, limit your growth stock holdings to a minimum. These are stocks that have high share prices relative to the company’s currency earnings. This means that the stock is valued on growth potential. While growth stocks tend to do particularly well in a bull market (what we have now–where the stocks in general are climbing), they can cause problems in the reverse. Because the disparity between actual earnings and the stock price can be quite large with growth stocks, a bear market can cause very dramatic setbacks in the value of a growth stock. It is very important to watch growth stocks carefully, and when you reach a certain level, sell. You may not make as much as you could have, but chances are that you will stay make a tidy profit, and you can get out ahead should the market take a tumble.
Value stocks should be the underpinnings of your investment strategy. They should also be present in your retirement account. Value stocks are those that remain relatively steady, offering much slower growth during bull markets than the riskier stocks, but providing for measured increases in value. Value stocks are, theoretically, fairly inexpensive in relation to current company earnings. They more closely match reflect the actual currency performance of the company. As a result, they retain their value better when the stock market is in a slump. While losses are present during such times, price drops in share value are not as dramatic as those seen in growth stocks.
You can reduce your risk by investing in stock funds that make use of hundreds of stock investments. Carefully check the stock funds before investing, though. Just as there are growth and value individual stocks, there are growth and value stocks funds.