Investing in growth stocks tends to be higher risk than value stocks. There are some pretty simple reasons for this.
But let’s assume I have £10,000 to invest. The question is, how much of my money should I be investing in growth stocks?
Why are growth stocks riskier?
Many new businesses fail. We see this all around us. Everyone has seen a new restaurant that opened on their high street and close within a year. And listed growth stocks are no different.
The main risk is that the expected growth doesn’t come about. There can be many reasons for this. But people invest in growth stocks because of an expectation.
This pandemic gave us several examples of this as investors ploughed into young pharma and biotech stocks which had Covid-19 treatments and vaccines in development.
However, many treatments or vaccines didn’t reach the market or, in Novavax‘s case, didn’t meet the market in time. I actually sold Novavax shares for $270. Today, they trade for $16. That’s because the expected growth — in this very short period of time — didn’t occur.
It can go wrong for anyone
In 2020, Cathie Wood was named the best stock picker of 2020 by Bloomberg News editor-in-chief emeritus Matthew A. Winkler. Wood, through her ARK Invest portfolios, invests in disruptive technologies — growth stocks.
It’s perhaps unsurprising that 2020 was a good year for her. Locked up in our homes and with no need to commute, the digital world took a step forward and investors ploughed money into the electrification agenda.
But 2020 is an outlier for Wood. As of May, 2022, Wood’s flagship fund, Ark Innovation, had lagged behind the S&P 500 for five years. The exchange-trade fund is down 70% from its all time highs. So, even a diversified growth-focused portfolio can slump.
The Innovation fund isn’t the only Wood portfolio to have suffered. Ark Next Generation Internet is down 69% over 12 months and 6% over 5 years.
And I think this highlights the risks associated with growth stocks. Even if I had invested in several funds managed by one of the best known investors in the world, I would still be down over five years in most cases.
How much should I invest in growth?
There is no simple answer. Personally, I only have around 15% in growth stocks, while the rest is in value, funds and cash. So, if I were investing £10,000, I’d probably only put £1,500 in conventional growth stocks.
However, growth stocks are not always disruptive technology firms. Instead the term can be used to describe anything we think is likely to outperform the market is terms of share price growth in the forthcoming years.
Stocks like Hargreaves Lansdown and Sociedad Quimica y Minera de Chile are established companies, paying handsome dividends, that could also be seen as growth stocks for different reasons.
The first is an online investment supermarket that has demonstrated its capacity to continually attract new investors to its platform, while the latter has a 25% share of the global lithium market — the silvery metal that is powering the future.
For me, typical growth stocks, like the ones Wood invests in, are too volatile to take up too much of my money, despite my love of Chinese EVs. I’ll take a compound returns strategy any day.
