More often than not, you’re going to hear from most investors that the best ways to invest money is a portfolio comprised of safe reliable blue chip stocks.
I’m not saying this isn’t true. But what I will say is that if you are a young inspiring investor, you may be hindering yourself by driving your investment portfolio in the slow lane.
A portfolio made up of dividend stocks is great, but….
You may be sacrificing overall market growth when you invest in solely dividend stocks. Why?
Well, when a company issues a dividend, the money that is issued to the shareholders comes directly from their profits.
When a company is issuing a percentage of their income to shareholders, it means they don’t have growth as their number one priority. If they did, they would be sending all possible capital to fund growth and expansion.
Due to this, you aren’t likely to see massive returns on dividend stocks in terms of their share price. Their earnings aren’t suddenly going to skyrocket, because they aren’t dumping millions or even billions of dollars into improving them.
Dividend stocks are great at providing stability and a consistent passive income to investors. But if your portfolio contains too many of these, you may be sacrificing the crucial gains that your portfolio needs at a young age.
Growth stocks are the key to lifelong investing success
A while back, my portfolio was comprised of solely dividend stocks. I was happy with the results, but could it have done better? Absolutely.
So I started researching some high potential growth stocks, and sold off some of the positions I had in my worst income stock holdings.
The results? Well, two stocks I purchased 6 months ago have returned me over 300% in that short amount of time.
You will never see those types of results from stable income stocks. However, keep in mind that with the potential for greater returns comes the potential for bigger losses.
When you invest in a growth stock, you are investing in the company’s future, and not its present. This presents a few problems. What are they?
Well, for one, potential is just that. Potential. You aren’t ever guaranteed anything when investing in a growth stock just as the number one pick in the draft isn’t guaranteed to be a franchise player. There is always risk, in fact significantly more risk than a dividend strategy.
That being said, a few successful growth stock picks can accelerate your portfolio to the point where it is years ahead of a dividend investor’s portfolio.
The choice is all based on your risk tolerance, and your age
Some people have an appetite for risk. That is why some people get excited about bungee jumping and others cringe at even the thought of it.
When it comes to investing, some people are willing to stick their necks out a little more to get a larger return, in my opinion.
Take more risks as a young investor
If you are a young investor, you should be employing a growth stock strategy. Because you have lots of working years left, your portfolio has the ability to withstand large fluctuations. This is because you don’t currently need the money.
If you face a heavy market correction, you aren’t anywhere near retirement and won’t feel the pressure of having to put more working years in due to the fact your portfolio has suffered.
Now, this isn’t to say you should head out and purchase a bunch of high-risk penny stocks. There are good growth stocks and there are awful growth stocks. Find those whose earnings are increasing year over year and are spending money wisely on expansion.
Not all of your picks will come to fruition and there will be some companies that never live up to their potential. Just trust your abilities and wait for the next pick. If you’re good you’ll pick more winners than losers.
Transition to an income portfolio as you get older
On the flip side, as an older investor, you need to take more precautions. That is why I would advocate an income portfolio for those approaching retirement. Hopefully in your younger years you picked a few growth stocks that have grown your portfolio to the point where you can live off the dividend income.
If you want to even go farther than that, you could invest in high-grade bonds. This will provide you with guaranteed income come maturity and will practically eliminate any stress you may feel about your investments fluctuating.
Overall, you may not be comfortable with taking risky moves even in your younger years. That is fine. Investing in dividend stocks at a young age isn’t wrong, and you’re still doing better than most in today’s economy. In my opinion, it just isn’t the most optimal path of really generating some substantial gains early on.