Dividend shares are definitely better represented within my portfolio than growth stocks. For every four or five dividend stocks, I have one growth stock.
There are several reasons for this. I’m not a day trader and I’m fairly risk-averse having built up a portfolio that I don’t wish to lose.
Also, by investing in dividend shares, I can look to use a compound returns strategy. This is essentially the process of reinvesting my dividends year after year, earning interest on my interest.
But risk is the major reason why growth isn’t my focus.
Growth vs value
A growth stock refers to a company that’s expected to increase its profits or revenues faster than the average business in its industry or the market broadly. In recent years, many notable growth stocks have been in the tech and biotech sectors.
Value stocks refer to more established companies and ones that tend to trade for cheaper prices than the financial performance and fundamentals suggest they should be worth.
Meanwhile, value stocks often pay a dividend, while growth stocks reinvest revenues into growth.
But, it’s important to note that many growth stocks fail and don’t deliver the promised growth. This is where the risk comes in.
A $50bn warning
Cathie Wood is CEO of ARK Invest, an asset manager named after the Ark of the Covenant that invests in disruptive innovation — that is, all growth stocks. And in 2020, the LA-born investor was named best stock-picker of the year by Bloomberg News editor-in-chief emeritus Matthew A Winkler.
However since 2021, Wood’s growth focused portfolios have tanked. Data published online suggests that total assets across Ark’s nine ETFs have slumped to $11.4bn from a peak of $60.3bn in February 2021.
This represents a near-$50bn loss.
As one of the world’s most famous investor, the collapse of her portfolios demonstrates the volatility of investing in growth stocks.
Wood’s ETFs seek to identify a handful of companies that can make exponential gains by shaping the future. The portfolios cover areas ranging from including space exploration and fintech, to robotics and the genomic revolution.
However, all of Wood’s ARK portfolios are down massively.
Her flagship ARKK’s shares are down 68% over 12 months, and are currently trading at their lowest point in five years. The portfolio has even underperformed the technology-heavy Nasdaq index, which is down 33% over the year.
Even sensible picks can go wrong
For me, what Wood’s story highlights is that even sensible picks in growth can go wrong. The 67-year-old has decades of experience in the industry and was deemed the best investor of 2020.
I do have exposure to growth stocks. I own shares of NIO, Scottish Mortgage, Hargreaves Lansdown and Sociedad Quimica y Minera de Chile.
But Wood’s challenges over the past year have reiterated the importance, for me, of sticking to a value-focused portfolio and reinvesting my dividends year after year.
