The myth
One thing that you learn when you start investing is how stocks in general can move up and down in value quickly.
In exchange for this volatility, these securities typically have the potential to rise in value quickly, relative to the speed of other assets. That’s why many people believe that stocks are only good if you’re following a growth strategy for your portfolio.
The reality
The potential of stocks to grow quickly is commonly seen as their main feature, and it’s true that this is possible for some shares from well-run companies which are expected to have great future performance.
However, not all stocks are created equal. Some type of stocks may not experience much volatility, and so may not suddenly increase (or decrease) in value. These are known as Index or Blue Chip stocks, usually have solid and reliable performance in the stock market, provide long-term capital growth, and consistently give dividends.
There are other types of shares which are notable for their potential to provide predictable returns. Real Estate Investment Trusts or REITs, for example, are required to give back 90% of their revenue, also by way of quarterly dividend pay outs.
Preferred shares are also another option. These have a higher claim to part of the company’s profits than regular (also known as common) stock, and so have a better chance of receiving dividends if the company issues them. The downside here is that preferred stockholders don’t get much price appreciation.
While these 3 types of shares might not be the best investments if you’re trying to grow your money to a certain amount by a specific date, they might be good for your portfolio if you’re looking for reliable income-generation.
The verdict: False.
While stocks generally have the potential to help a growth strategy be successful, Blue Chips, REITs and preferred shares can be good if you’re investing to have a steady source of income.
Of course, there are no guarantees that you’ll reach either goal no matter what assets you add to your portfolio. Still, picking investments with the appropriate characteristics (growth or dividend potential) could drastically increase your chances, compared to not making how these products behave as your basis.
If you’re considering adding stocks to your holdings, just keep in mind that their volatility makes them suitable only for an Aggressive risk profile. So, if you’re a Conservative or Moderate investor, you should think twice about putting your money in shares of any company.
That’ll help keep you from exposing your cash to more risk than you’re comfortable with.
