With no savings at 40, should an investor look at growth stocks or value shares?

Stephen Wright thinks investors should consider focusing on value shares as they get closer to retirement. But 28 years is plenty of time for growth.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As a rule, I think investors should consider tilting their portfolios towards value shares as they get closer to retirement. And this is true whether the ambition is building wealth or earning passive income.

Someone aged 40 won’t be eligible for the State Pension in the UK for another 28 years. And that means there’s plenty of time, which opens up more possibilities in terms of growth stocks.

Growth and value

Investing in the stock market’s about buying a stake in a company in the hope that it will one day make enough to provide a decent return. And there are two big differences between growth and value stocks.

Should you invest £1,000 in Croda right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Croda made the list?

See the 6 stocks

The main difference is when the company will provide that return. In general, value shares that trade at lower multiples of sales and earnings offer a much larger return in the near future. 

The second difference is how much the business will provide over the long term. And in exchange for a lower short-term gain, they tend to have better prospects for generating huge returns further over time.

An investor who’s looking to retire in five years probably doesn’t have time to wait 20 or 30 years for a company to grow. But for someone with a longer time horizon, things might be different.

A UK growth stock

Halma (LSE:HLMA) is a good illustration of this. The FTSE 100 firm has a market value of £10.5bn and made £333.5m in free cash last year – a return of just over 3%. 

For an investor with a shorter time horizon, this might not be so attractive. A five-year UK government bond currently comes with a 4.2% yield.

To be able to offer investors a better return than this, Halma will need to grow its free cash flow by 10% a year. And that’s far from guaranteed.

Halma generates a lot of its growth by acquiring other businesses, meaning it depends on opportunities presenting themselves. And there’s a risk they may not in a five-year period. 

Long-term investing

Over 30 years however, the equation becomes much better. The corresponding bond has a 5% yield, but just 3% annual growth from the business will see Halma generate more cash.

That reduces the risk for investors. And while the firm might go through a five-year cyclical low in terms of acquisitions, I wouldn’t expect this to last until 2054.

Over the last decade, Halma’s free cash flow per share has grown by 11.5% a year on average. Even if it manages half of this going forward, this should generate enough cash to support an 8.4% annual return.

This doesn’t eliminate the risk of growing by acquisitions – there’s still a possibility of overpaying as a result of a misjudgement. But the investment equation makes much more sense over a longer timeframe and is worth considering.

No savings? No problem…

Even with no savings, using part of a monthly income to invest in shares can bring terrific returns. And growth stocks can be a great choice for investors that are thinking in decades, rather than years.

Investors need to be prepared to wait for growth to emerge. But while I think those with a short time to retirement should consider focusing on value shares, 28 years is long enough to be looking for growth.

Should you invest £1,000 in Croda right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Croda made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Halma Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

With average 10% yields, these mid-cap FTSE shares could supercharge a passive income portfolio

Some of the best passive income gems can be found on the UK's smaller indexes like the FTSE 250 and…

Read more »

A coin being dropped into a piggy bank
Investing Articles

As the Barclays share price tanks 19% in 2 days, is this a great buying opportunity?

As a trade war sends the Barclays share price into a tailspin, Andrew Mackie steps back to look at the…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Is Fundsmith Equity still a good choice for a Stocks and Shares ISA in 2025?

Many Britons hold the Fundsmith Equity fund in their Stocks and Shares ISAs. Is this still a good move? Edward…

Read more »

Investing Articles

Nvidia stock is down 24% this year. Time to buy the dip?

Christopher Ruane has been eyeing Nvidia stock as a potential addition to his portfolio for a while. Is a recent…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Down 25% since January, this resilient dividend stock’s catching my eye

Maintaining the UK’s rail, water, and energy infrastructure isn’t the most exciting business. But it has made this a solid…

Read more »

Investing Articles

Prediction: Unilever to outperform the FTSE 100 over the next 12 months

The FTSE 100 has made a strong start to 2025, but Stephen Wright thinks a popular dividend stock could be…

Read more »

Investing Articles

I just bought this legendary S&P 500 tech stock for my ISA, 27% off its highs

This S&P 500 stock has tanked over the last month and Edward Sheldon has snapped it up for his portfolio…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 beaten-down stocks to consider for an ISA after the massive market sell-off!

The stock market has had a sudden meltdown! Yet our writer thinks these two growth stocks look attractive candidates for…

Read more »