(CTN News) – Growth stocks tend to have higher risk than value stocks. In this case, there are some pretty simple reasons.
Let’s assume I have £10,000 to invest. How much of my money should I invest in growth stocks?
Risky growth stocks: why are they risky?
There are many brusinesses that fail. Everywhere we look, we see this. It is common for high street restaurants to open and close within a year of opening. There is no difference between listed growth stocks and unlisted growth stocks.
The main risk is that growth does not occur as expected. This can be caused by a variety of factors. It’s because people expect growth stocks to perform well that they invest in them.
There were several examples of this in the Covid-19 pandemic, since investors flocked to pharma and biotech stocks with treatments and vaccines in development.
Many treatments and vaccines didn’t reach the market or, in the case of Novavax, weren’t available in time. In fact, I sold Novavax shares for $270. Currently, they trade for $16. The reason for that is that the expected growth – in such a short period of time – did not take place.
Everybody has the potential to make a mistake
Cathie Wood was named the most successful stock picker of 2020 by Bloomberg News editor-in-chief emeritus Matthew A. Winkler in 2020. Through her ARK Invest portfolio, Wood invests in disruptive technologies – growth stocks.
Her performance in 2020 shouldn’t be surprising. Due to the digital revolution and the fact that we are no longer commuting, investors have poured money into electrification plans.
In 2020, Wood is an outlier. A five-year lag had been observed between Wood’s flagship fund, Ark Innovation, and the S&P 500 as of May, 2022. Exchange-traded funds have fallen 70% from their all-time highs. It is possible for even a diversified growth-focused portfolio to experience a slump.
Wood portfolios haven’t just suffered from the Innovation fund. In the last 12 months, Ark Next Generation Internet has been down 69% and over the past 5 years, it has been down 6%.
Growth stocks carry risks, and I think this highlights them. I would still be down over five years even if I invested in several funds managed by a world-renowned investor.
Is there a certain amount I should invest in growth?
Answers are not simple. The majority of my investments are in value, funds, and cash. As a result, if I were to invest £10,000, I probably wouldn’t invest more than £1,500 in conventional growth stocks.
Growth stocks are not always disruptive technology companies. It can be used to describe anything that we think will outperform the market in the next few years in terms of share price growth.
It is possible to view established companies, such as Hargreaves Lansdown and Sociedad Quimica y Minera de Chile, as growth stocks for a variety of reasons.
First, there is an online investment supermarket that continually attracts new investors, while the latter owns 25% of the global lithium market.
Even though I love Chinese EVs, typical growth stocks, like the ones Wood invests in, are too volatile for me. Any compound return strategy will do for me.
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