Seeking Growth Stocks

There will always be a place in retirement accounts for low growth, income producing securities. This makes sense because the first priority of most clients is to protect their nest egg or retirement funds. Today, I want to make the case for owning growth stocks in retirement portfolios.

Some of my clients and business associates may disagree, but I have always looked at myself as a value investor. I believe I can add value to portfolios if I can buy stocks and bonds at discounts to their true intrinsic net worth. This is a comfortable description because it often aligns my comfort zone with those of my clients. Most clients fear losing what they have accumulated more than producing long term capital gains via growth stocks. 

There are a few truisms that we all acknowledge. It is true that we are all getting older every day whether we like it or not. The good news is that we are healthier and likely to live longer than our parents and grandparents. This presents a dilemma for all savers and investors. We now find ourselves needing to plan for a retirement period far longer than previous generations. How do we do that?

I believe we do it with a combination of income producing stocks that have the capability to increase payouts and a healthy percentage of growth stocks that will enable our retirement funds to increase in value as interest rates rise over the next ten years.

Using data provided from Baron Funds, they illustrate that growth stocks outperform value stocks in a sluggish economic environment with low and rising inflation. Over the past 32 years, growth stocks outperformed value stocks when GDP (growth in the economy) grew at a low level (between 0% and 2% annually). During this period of low anemic growth, growth stocks were up 15.8% vs. 11.9% for value stocks.

Growth stocks, in particular, benefit from periods of low and rising inflation. An investment in a company that is growing at a pace that is faster than inflation should result in a higher stock market valuation because the company's intrinsic value should be worth more, all else being equal. Bonds and other fixed income securities are promises to pay a fixed amount in the future. With inflation, the value of the fixed amount will be diminished.

While past performance is no guarantee of future performance, economic uncertainties because of the imbalance between fiscal and monetary policies around the globe point toward a sluggish growth environment for the foreseeable future. From my perspective, I believe we need to plan for a longer retirement period in our strategic planning and asset allocation decisions. Knowing that investors have different goals and objectives, the case for owning high quality growth stocks should be strongly considered by all investors.

Have a great week,

 

Roger N. Steed

February 11, 2013

 

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