How you think about growth depends on what kind of investor you are. Growth can be the basic need for your investments to increase in value over time. It might also refer to the specific types of investments that will drive your progress.
Do You Know How Growth Works?
Growth: The Basics
Saving vs. Investing
When thinking about your retirement and future net worth, you may not have a specific number in mind. You may not even have a specific strategy in mind. You just know you need a lot more money than you have now.
Saving money will help, but investing is the key to growing your money over time. While the terms might be used interchangeably, they’re definitely not the same. Saving means putting aside money that you’ll need soon. These accounts give you easy access to your money but may have minimal growth prospects and generally cannot outpace inflation. Bank savings accounts and money markets, for example, are generally used for short-term expenses, not long-term goals.
Investing involves participating in the growth of a company or other entity, where you buy and hold assets for a longer time period to seek an increase in value. Stocks and bonds, individually or within a mutual fund, are commonly used investment vehicles.
You need both short-term savings and long-term investments to position yourself for your goals now and in the future.
Savings by Itself Won’t Be Enough
Source: American Century Investments Future Value Calculator, Dinkytown.net, 2020. This hypothetical situation contains assumptions that are intended for illustrative purposes only and are not representative of the performance of any security. There is no assurance similar results can be achieved, and this information should not be relied upon as a specific recommendation to buy or sell securities. Calculations for investing assume 6% returns over years indicated. Calculations for low-interest account assume 1% interest over the periods indicated. All calculations do not represent a specific investment portfolio or savings account type. Consider other differences between bank savings and investing. Risks and rewards are greater when investing and bank savings may have more muted up and down swings; money may be accessible more quickly in a savings account; and fees for both can vary greatly.
What Drives Growth Over Time?
Stocks, in particular, are more volatile but have more growth potential if you’ve got a long-term time frame. Take another $10,000 example below. Stock investments have the potential to grow that original $10,000 much more than regular savings or low-growth options.
You could lose money in the dips. You could make money in the peaks. It’ll likely be a combination of the two, but those ups and downs have historically resulted in a significant upward trend over time.
Stocks Are Volatile—But Strong Rebounds Have Made It Worthwhile
Hypothetical Growth of $10,000
Hypothetical value of $10,000 invested at the beginning of 1980. Assumes reinvestment of income and no transaction costs or taxes. This hypothetical situation contains assumptions that are intended for illustrative purposes only and are not representative of the performance of any security. There is no assurance similar results can be achieved, and this information should not be relied upon as a specific recommendation to buy or sell securities.
Source: FactSet, data as of 12/31/2019. Stocks are represented by the S&P 500® Index. Bonds are represented by Barclays Capital U.S. Aggregate Bond Index. Money Markets are represented by the FTSE 3-Month U.S. T Bill Index, often used as a benchmark for money market investments. The indices are not investment products available for purchase.
Read on to see how to use specific types of growth in your portfolio.
Gauge if you’re saving enough.
Evaluate the current level of growth in your portfolio.
Learn more about the investment options available to you.
Growth: What It Means
Investing in Growth Has Its Highs and Lows
Different types of investments add different features to your portfolio. Some have more or less potential to increase in value, and some have more or less exposure to risk.
The riskier investments below, for example, might get you higher returns one year and negative performance the next. The “safer” options might not lose money, but they may not necessarily grow much either.
Source: American Century Investments.
How Can You Manage Highs and Lows? Try Diversification
Relying on any single investment above may not provide the results you need over the long term. But a diversified portfolio—made up of a variety of investments—may balance out the extremes. Read more in The Surprising Truth About Diversification.
Remember, however, it’s not the quantity of investments that determines diversification; it's the overall mix that matters.
What Diversification Is—And Isn’t
Allocations are hypothetical and are not reflective of an actual investment product.
Balancing the Right Growth Mix for You
Should every investor’s portfolio look the same? Certainly not. The mix of investments (and the percentages of each kind) should reflect your own personal circumstances: the amount you’ve already saved, your age, your current and future contributions, the amount of time until you’re ready to use your money, your comfort with (or fear of) risk, among other considerations.
Generally, younger investors should have a higher percentage of stocks than any other type of investment. This mix reflects their need to grow their portfolios from scratch. The risk of shorter-term stock market losses is balanced by the potential for those stocks to rebound and grow over a longer time frame.
Source: American Century Investment. Hypothetical portfolio allocation is for illustrative purposes only.
Younger Investors: Consider Stocks for Growth
Stocks: High percentage often needed for long-term goals
Those closer to retirement, on the other hand, may not have the luxury of time if they retire during or soon after a down market. To counter market risk, investors should consider gradually decreasing the amount of stocks over time—but not abandoning them. Far from it, actually. Most people will still need to keep a significant portion of stocks in their portfolios. The continued growth potential will help lower the chances of running out of money in retirement.
Source: American Century Investment. Hypothetical portfolio allocation is for illustrative purposes only.
Pre-Retirees: Don’t Retire Your Stocks
Stocks: Continued growth potential through retirement
Read on to see how to use specific types of growth in your portfolio.
Gauge if you’re saving enough.
Evaluate the current level of growth in your portfolio.
Learn more about the investment options available to you.
Growth: The Next Level
Where Do You Grow From Here?
The problem with growth is that it comes with market risk. But there are ways to mitigate that risk, even if you can’t take it away completely.
Let’s look at emerging markets in the purple boxes below. Emerging markets are a common growth allocation in a portfolio. In the last decade, this asset class has been a top performer—and a disappointment—depending on the year. While that’s an extreme case, no asset type is consistently at the top from year to year. That’s why having a diverse allocation (and a diversified portfolio, in the dark green boxes) is key to managing risk and smoothing out performance over time.
There’s No Pattern to Performance
Diversification Balances Asset Class Performance
Source: Morningstar. Data as of 12/31/2020. The diversified portfolio is a hypothetical example of an equal weighted portfolio of all other represented asset classes (e.g. 1/10th allocation). Diversification does not assure a profit nor does it protect against loss of principal. Asset classes are represented by the following indexes: Foreign Bonds = Bloomberg Barclays Global Aggregate Bond Index, Core Bonds = Bloomberg Barclays US Aggregate Bond Index, Cash Equivalents = Bloomberg Barclays US 1-3 Month Treasury Bill, High Yield = ICE Bank of America Merrill Lynch U.S. High Yield Constrained Index, Foreign Equities = MSCI EAFE Index, Emerging Markets = MSCI EM Index, REITs = MSCI US REIT Index, Large Cap Equities = S&P 500 Index, Commodities = S&P GSCI, Small Cap Equities= Russell 2000 Index. It is not possible to invest directly in an index.
Are You Missing Out on Different Kinds of Growth?
Before you know whether you’re properly set up for long-term growth, you need to know your options. Stock (as well as other asset classes) can be divided into many sub-asset classes, each one providing a different opportunity.
More to the Mix
The right mix for you should provide the right amount of growth and risk management for your situation.
Stocks
Large-Cap Growth, Core & Value • Mid-Cap Growth & Value • Small-Cap Growth & Value • Non-U.S. Developed Growth & Value • Non-U.S. Small/Mid Emerging Markets
Bonds
High-Quality • High-Yield • Inflation-Adjusted • Non-U.S. Developed • Global • Emerging Markets
Cash Equivalents
Money Market
Alts
Alternative Income • Market Neutral Strategies
Allocations are hypothetical and are not reflective of an actual investment product. Source: American Century Investments. Alts = Alternative investments. Read more about each type of investment in Completing Your Portfolio.
Mind the Gaps
Even if you’ve built a portfolio that includes a diverse mix of growth investments, continued market volatility can disrupt your plans. Gradual shifts in your portfolio allocations could leave gaps in your overall strategy, leaving you exposed to more risk or off your path for future growth.
Wondering how this market risk—along with inflation risk, longevity risk, sequence-of-returns risk and others—has affected your portfolio? Let’s talk: Request a call.
Explore the various asset classes and how they can be used.
Evaluate the current level of growth in your portfolio.
Learn more about the investment options available to you.
Diversification does not assure a profit nor does it protect against loss of principal.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
As with all investments, there are risks of fluctuating prices, uncertainty of dividends, rates of return and yields. Current and future holdings are subject to market risk and will fluctuate in value.
Generally, as interest rates rise, the value of the bonds held in the fund will decline. The opposite is true when interest rates decline.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
International investing involves special risk considerations, including economic and political conditions, inflation rates and currency fluctuations.
Alternative mutual funds that hold a variety of non-traditional investments also often employ more complex trading strategies than traditional mutual funds. Each of these different alternative asset classes and investment strategies have unique risks making them more suitable for investors with an above average tolerance for risk.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.