A Key New Year’s Resolution: Invest for Growth

Thursday, December 30, 2010

Last December I provided four New Year’s investment resolutions that were applicable in all markets (listed below). It seemed many investors were still shell-shocked and needed to be reminded that no economic/market environment lasts forever. Therefore, it was important to continue practicing sound investment principles.

For 2011, however, there is one resolution that many investors need to adopt…

Invest for growth

As I wrote last year in resolution #4, there are three investment objectives: safety, income and growth. A winning investment strategy is to pursue all in a combination that matches the investor’s goals and “risk tolerance.” That latter term means a portfolio allocation that can be lived with in good times and bad.

Today’s skewed portfolios

To add growth into a portfolio means taking on the risks and returns from ownership (e.g., common stocks). But the phrase, “stock market,” still produces negative feelings for many investors. Therefore, they remain focused on safety and/or income.

A skewed, safety/income portfolio can be appropriate for banks and insurance companies, with their yield-based liabilities. However, for investors that are seeking increased “real” (purchasing power) wealth, growth is a necessary component.

Growth’s timing is uncertain, but it is a certainty

Leaving growth out of a portfolio is a recipe for underperformance. I understand that looking back the past few years can make the pursuit of growth look futile. But investing is like that. The rear view mirror rarely gives you a view of the future.

So… Resolve to give growth its proper portfolio portion along with safety and income. Doing so is the only way to share in real valuation creation – and avoid the disappointment that inevitably comes from an improperly skewed portfolio.

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Here are the four resolutions from December 2009:

#1 – I resolve to treat risk in a consistent manner and use an investment approach that I can live with, no matter what is happening in the markets. (Article)

#2 – I resolve to use performance numbers ONLY to measure my results. ALL of my investment selection will be based on non-performance analysis. (Article)

#3 – I resolve to always practice sound diversification. (Article)

#4 – I resolve to always expect a sensible combination of income, growth and safety from my investments. (Article)

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