The recent decline in the stock market may convince some investors that owning FTSE 250 growth shares is too risky. Some companies have seen their shares slump dramatically as investors respond to the uncertain outlook facing the world economy.
However, FTSE 250 growth shares may be worthy of consideration for investors who are seeking capital growth over the long term. Following recent stock price falls, they could offer growth at a reasonable price. They could also provide high capital returns as part of a diverse portfolio of stocks.
Growth shares on offer
Growth companies tend to be affected more by changes in the outlook for the global economy than defensive investments. For example, consumers may decide to forego expensive premium products in favour of other low-cost options.
As such, growth shares tend to underperform during times of uncertainty. But this does not tend to last. When the outlook for the global economy starts to improve, growth stocks can see a dramatic improvement in performance.
So, while these companies may experience further uncertainty in the short term, they have the potential to generate healthy returns over the long run.
Growth stocks tend to outperform defensive investments over the long term.
However, picking growth stocks can be a risky business. Because these businesses rely on their growing earnings to provide the cash they need to to keep the lights on, a small decline in short-term fortunes can have a significant impact on the business’s long term prospects as a result.
With this being the case, investors may be better off sticking with FTSE 250 growth shares. These companies may offer the perfect combination of growth and safety.
These firms are still growing, but they’re well established enough that they’re unlikely to collapse after just one or two bad months.
For investors who are looking to benefit from the capital growth potential of growth stocks without taking on too much risk, a diverse portfolio of FTSE 250 companies may offer the perfect combination.
Diversification is essential in the current environment. The outlook for the global economy is highly uncertain right now. It’s impossible to tell how long the coronavirus crisis will last, and what the long term impacts of the crisis will be on the global economy.
It is also impossible to tell which companies will survive the crisis. Therefore, the best way for investors to prepare for all eventualities could be to own a diverse portfolio of FTSE 250 growth shares.
Spreading your capital across multiple industries and regions means you’ll become less reliant on a small number of sectors or companies.
This should allow you to benefit from the upside potential of these investments while minimising risk at the same time. Such an approach should help you achieve a growing level of financial freedom over the long run.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.