The FTSE 100 index has seen a solid move higher in recent weeks. It has broken the psychological barrier of 7,000 points, and is now above 7,100. As part of this move, UK growth stocks are helping to lead the charge. Yet with UK markets lagging behind other global stock indices, I think there’s further to go in this move during 2021.
Targeting UK growth stocks
The main reason why I want to target UK growth stocks is that these are the companies that typically offer higher returns. The FTSE 100 is an index comprised of different types of firms. If the FTSE 100 rallies 10% this year, it could be that growth stocks give a 15% return, with dividend stocks or mature companies offering (maybe) a 5% return. This blends together to give the overall index performance.
So if I want to make, say, £200 a month have the best chance of getting returns, I’d probably head to growth stocks.
Of course, this strategy won’t apply to everyone. For example, I might be in a position where I want to invest in low-risk stocks to avoid the high volatility often seen in growth stocks. Or I might have a need to generate income from dividend stocks instead. Growth stocks typically reinvest the bulk of profits in the business to fuel growth, instead of paying it out to shareholders.
Yet if my aim is to try and target high capital gains, I feel UK growth stocks are my best option.
Why invest monthly?
If the stocks I’m looking at historically have outperformed the FTSE 100 index, then why don’t I just invest all my money straight away instead of monthly? By the very nature of growth stocks, I don’t think this would be a good idea. As mentioned above, such stocks usually have quite high volatility, meaning that the share price is choppy.
So by investing £200 each month, it allows me to take advantage of times when the share price has dropped a little lower. ‘Averaging-in’ allows me to smooth out the volatility over time. After all, I’d hate to simply invest 100% in one go only to see the share price fall 10% the following month!
The other benefit of investing monthly in UK growth stocks is that it’s easier on my cash flow. Ideally, I want to build a large investment pot over time. By investing each month with an amount that I can afford makes it more sustainable. Otherwise I’m going to be waiting to accumulate a lump sum or for some unexpected cash inflow before I can invest.
The downside of investing monthly is that it’ll take longer for me to accumulate stocks than with a lump sum. However, I feel this simply helps to teach me patience, a valuable quality I need to have in order to be a profitable investor. That said, I won’t be too patient as I’ll get started right away!
jonathansmith1 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.