Popular Investment Strategies: Which One is Better for Young Adults?

InvestingThere are several different investment strategies, or styles, that conform to different risk-reward profiles. You’ve probably heard of these styles before. Generally speaking, there are three major styles: growth, value, and income.

How investment strategies and styles differ

Not all companies are the same. Some grow faster than others. Some don’t grow at all, and instead pay out big dividends, like many REITs.

Here’s a short introduction into each style:

  • Growth – Growth funds, or companies that fit a growth profile, are generally younger companies in new and emerging industries. Netflix, for example, is a perfect “growth” stock because it is in a new market (internet TV) and the market is growing quickly. Growth investors are typically focused on companies that are growing sales more so than profits. Netflix, for instance, will be investing most or all of its profits back into the business to get more market share. The idea is that the company can grow now and delay profitability until it is certain that it owns the market for internet TV.
  • Value – Value funds and value stocks are generally slower-growing, mature companies in mature industries. Insurance is a classic value stock business because insurance is not a new product, nor does the insurance market grow very quickly. The car insurance business, for instance, generally grows with population growth and rising automobile prices. That is to say that it grows quite slowly. Of course, investors shouldn’t denounce this style because it lacks huge growth opportunity. Value stocks can provide high returns to shareholders because they trade less expensively, and often drive value by paying out dividends and buying back stock.
  • Income – Income funds focus on a combination of growth from rising stock prices, and income from dividends. Income funds play on the idea of “getting paid to wait,” meaning that you collect dividends while waiting for a stock price to increase. Unlike growth funds which generate most of their return from rising stock prices, income investments provide balance between dividends and capital appreciation.

What’s the best style?

Over history, value has proven to be the best style. That’s over the very long haul, however. Each style runs hot and cold. During the 1990s, value-style funds were trumped by growth as a dotcom boom took hold. The Wall Street Journal writes that several years of lagging performance from value funds left investors to withdraw their funds, leading to the closure of many lagging value funds. Of course, the bubble later burst, and value funds caught back up.

Unless you have the conviction to hold through with one style even if it tests your patience for years, a mix of value, growth, and income-focused funds is a great way to go. Income funds will lead your portfolio in down years. Growth will likely lead in the most bullish of markets. And value funds will prevail as the occasional big winner, but lag for extended periods of time in between.

What if you want to be more simple? No problem – stick to an index fund.

A choice in strategy or style can be a false choice. The S&P 500 index comprised of the largest 500 stocks in industries that best align with the make up of the American economy has exposure to value, growth, and income-style stocks all in one single product. In short, it’s everything from every style in a collection that mirrors the economy as a whole. Plus, unlike style-specific mutual funds, index funds are very cheap to hold, which is why they often beat actively-managed funds over very long periods of time.

What’s the best for young adults? Simplicity. If your 401k provides for a way to pick an index fund over style mutual funds, go for the index. The cost-savings will make a bigger difference on returns than would picking a specific strategy.

10 Responses to Popular Investment Strategies: Which One is Better for Young Adults?

    • Completely agree with you here. The income style isn’t the most appropriate for young adults, since this is the perfect time for them to be more risky and grow their portfolios. They just need to understand that their asset allocations needs to change to a more conservative one the closer they get to retirement.

  1. I always prefer index funds because of the low fee. Traditionally I have broken my investment up like this: 25% Large Cap Growth, 20% Med Cap Growth, 20% Small Cap Growth, 20% International Growth, 10% Emerging Markets, 5% income. I am 28 so growth suits me well. Lately I have considered shifting more into dividend funds.

  2. It’s good to start investing while we are still young and I am willing to try out different ways to invest my money, but I always make it a point to plan out my investment strategies before investing my money.

    • I think you rightfully highlight the importance of planning your strategies. I see many people start buying many different investments without a consistent asset allocation strategy and then wonder why their portfolio is not performing they way they expect it to.

  3. For young or inexperienced investors they first need to get their investment education started first. Investing your money with a fund or by themselves require knowledge, don’t go blindly in the market. Even if someone else is taking care of your investments, you need to be aware of the choices that they are making and know if it’s suited to your financial goals. It’s like going to a mechanic and not knowing remotely a thing about cars. If they tell you that X or Y Parts needs to change you will just go with it, even if they tell you that it will cost an arm and a leg. You don’t have a choice and could probably make wiser decisions if you increased your knowledge in broad about cars and parts. You don’t need to know how to fix it, but at least know what they are talking about. Know the different investment strategies that’s available and why they would suit your needs.

  4. The value vs growth debate is as old as investing itself. Which is best, value or growth? When is the best time to invest in value stock mutual funds? When is the best time to invest in growth stock mutual funds? Is there a smart way to balance both value and growth in one mutual fund? What happens to the debate when we enter index funds into the comparison?

  5. This article definitely hits the nail on the head. I couldn’t agree more, growth and value are the most important factors when a young investor is starting out. Income is important later on. My investment strategy is very similar. I use fundamental analysis to find companies that have excellent financials and potential for growth, it’s really important to spend a significant amount of time find the right companies and committing with confidence. Chasing income at a young age is counterproductive in my opinion. Great post.