Investment strategies guide: From growth to income, find your perfect match
By Boring Money
1 Nov, 2024
It can be tempting to see stock market investing as homogenous, full of risk and volatility. However, there are many different ways to approach stock market investment, with options to suit every type of investor – from those who are comfortable with its highs and lows, to those who would prefer something a little more sedate.
In deciding on the right strategy, a new investor will need to consider the below checklist:
While there are a lot of nuances within individual strategies, the below are the main options for investors.
Capital growth
In reality, all stock market investments target capital growth; otherwise, investors would just invest in a savings account! That said, dedicated growth investing aims to invest in companies with the potential to grow at a higher rate than their peers or the wider market. This may be because they are in a fast-growing sector, have a skilled management team, have unique products, or are tapped into long-term themes in the global economy.
Investing for growth is separate from investing to generate an income. It will almost certainly mean accepting higher short-term risk and volatility and requires a long-term perspective. It can take time for markets to recognise that a company is growing, and for it to be reflected in the share price.
Many strategies come under this umbrella. It will include, for example, smaller companies, technology, or emerging markets. In general, investing for capital growth is a strategy best suited to younger investors who have longer to ride out any additional volatility. Those investing for long-term growth should have a time horizon of five to ten years.
Capital growth investments to consider: technology, emerging markets, ‘growth’ funds, smaller companies
Capital growth investing would be better suited for investors who answered the below in the checklist at the start of this article:
Income
Many investments pay out some form of income. In the case of shares, companies pay out a share of their profits in the form of "dividends". Often it is larger, better-established companies that pay regular dividends, while smaller, higher growth businesses may recycle their profits back into the company.
Taking an income approach is a steadier option for investors. Paying a dividend imposes discipline on companies. They need to be generating sufficient cash to make a payout and the commitment to paying a dividend can help companies be more disciplined in the way they spend money.
There are a range of collective funds that specifically target and combine companies that pay a dividend, also known as equity income funds. These dividend funds will often pay a similar level of investment to a savings account, but unlike a savings account, the income can grow over time in line with inflation. That said, if companies don’t make their profit forecasts, their dividends may be at risk. This was seen during the pandemic when companies were forced to cut their dividends.
There are other types of income from investment. Bonds, for example, make regular interest payments. The level of interest paid will vary with the perceived risk of the bond, so a bond issued by a developed market government (the UK, US, or Germany) will have a lower payout – or ‘coupon’ - than a high risk company that issues bonds. Again, there are a range of dedicated bond portfolios that will combine these investments in one place.
Income investments to consider: UK equity income, global equity income, Europe excl. UK, larger companies.
Income investing would be better suited for investors who answered the below in the checklist at the start of this article:
Value or growth
Value and growth are different approaches to investing in the stock market. They may be used to achieve capital growth, income, or both.
In general, growth strategies prioritise earnings growth and are less sensitive to the stock market valuation of an individual company. A typical example may be technology, where investors reason that it is worth paying more for a company that can grow quickly over the long term. Growth investors will tend to gravitate to areas such as technology, consumer discretionary, non-essential products and services like luxury retail, entertainment, cars, and leisure activities that consumers typically purchase when they have extra disposable income beyond their basic needs, and communication services.
Value investors tend to look for companies that are undervalued by the market relative to their prospects. This type of mispricing may occur when a sector or company becomes unfashionable, or when investor attention is turned elsewhere. A company may have had a short-term problem that has been exaggerated by investors, which has sent the share price lower.
Value and growth strategies will often perform well at different times in the market cycle and it can be sensible to hold both in a portfolio. Growth strategies will do well when market confidence is high and economic growth is booming. Value strategies tend to be more defensive, performing well when markets are more nervous.
Value funds: These are available on most major markets (US, UK, Europe, and Asia) and will usually be labelled ‘value’ or ‘recovery’.
Growth funds: These are also available on most major markets and will be labelled ‘growth’, ‘dynamic’ or 'aggressive'.
Value investing would be better suited for investors who answered the below in the checklist at the start of this article:
Active versus passive
Investors may also choose an active or passive approach to achieving their investment goals. With an active fund, a fund manager is at the helm and aims to use their skill and judgment to pick the best companies in a particular sector or market. These funds can be more expensive, and not all fund managers will beat the index consistently. It pays to look for recommendations from experts, such as the investment platforms.
The alternative is to pick a fund that tracks an index, such as the FTSE 100 or S&P 500. This might be an ETF or a tracker fund. This gives you cheap and diversified access to markets. However, indices are usually ‘market capitalisation weighted’, which means that you’re getting exposure to the largest stocks in a particular stock market. This can increase the risks in a portfolio – for example, an MSCI World tracker would have over 70% in the US market.[1]
Passive funds are usually named after the index they are replicating – the iShares Core S&P 500 index, for example, or the Invesco MSCI World ETF.
Active investing would be better suited for investors who answered the below in the checklist at the start of this article:
Passive investing would be better suited for investors who answered the below in the checklist at the start of this article:
Buy and hold
Buy and hold investing does what it says on the tin. Investors aim to buy an investment and stick with it over the long term. This has proved a sound investment strategy over the years, helping to keep trading costs to a minimum. It also helps investors avoid the temptation to buy when stock markets are high, and sell when they are low. Investors are prone to FOMO when there is lots of interest around a particular area, but also deep gloom when there is lots of pessimism. The best strategy is to simply hold on through the ups and downs and try to avoid timing the market.
Funds that take a buy and hold approach will usually have a low turnover – 10-15% per year.
The right option will depend on what you need from your investment, how long you have to invest, and your general appetite for risk. You can minimise the risk of any strategy by saving regularly, ignoring the noise and holding for the long term. Investing doesn’t have to be a seat-of-the-pants ride.
Buy and hold investing would be better suited for investors who answered the below in the checklist at the start of this article:
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