Growth stocks are companies growing at above-average rates compared to other companies in their industry. These companies are typically younger and focused on innovation and disrupting older industries.
High growth means a chance for high stock price growth, so they're popular among many investors. Finding the next Amazon early enough could be someone's seven-figure retirement ticket. But with this upside comes increased risk and volatility, as the past couple of years have reaffirmed.
After a 2020-to-2021 bull run that saw many growth stocks skyrocket in value, 2022 was a rude awakening. Luckily, this year has been more promising for growth stocks, leading investors to wonder if now is the time to jump back in.
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Volatility is the name of the game
Volatility is inevitable in the stock market, but growth stocks are inherently more volatile because they're typically valued on (sometimes unrealistic) expectations and potential. When the stock market is booming and the economy is good, investors are more willing to take on more risks, and flock to growth stocks.
There's a reason companies like Peloton (PTON 0.66%), Zoom (ZM 0.15%), and Moderna (MRNA 3.01%) were stock market sweethearts during the early stages of the COVID-19 pandemic. They were at the right place at the right time.
Data source: YCharts
Unfortunately, the opposite also happens. When expectations for growth stocks aren't met, or the outlook changes -- either because of company performance or the broader economy -- investors often jump ship faster and head toward more stable, time-tested companies and industries.
Look no further than the three stocks mentioned above as an example. Here's roughly how much they're down since their pandemic peaks:
- Peloton: 95%
- Zoom: 88%
- Moderna: 69%
This constant back and forth adds to the volatility of growth stocks. Being able to stomach the swings is a large part of being an effective growth investor. When you believe in a company's long-term potential, it's easier to stomach the inevitable volatility along the way.
Consider putting yourself on an investing schedule
Instead of trying to pick the right time to jump back into growth stocks, you should aim for consistent investments regardless of stock market conditions. Trying to time the stock market is a fool's game that no investors get right long-term. You may time the market occasionally, but it's virtually impossible to do consistently over the long run.
A better approach is using a strategy like dollar-cost averaging, which involves making set investments at set intervals no matter what. For example, you could decide to invest $250 bi-weekly when you receive a paycheck. Are stock prices up when that time comes? Invest. Are stock prices down? Invest. Are stock prices unchanged? Invest.
Using dollar-cost averaging reduces the pitfalls of trying to time the market because your investment schedule is already set. Over the long run, the idea is that it will average out (hence the name), with you buying more shares when prices are low and fewer shares when prices are high.
More importantly, dollar-cost averaging can help you focus on the long term, which is crucial when you're dealing with the volatile nature of growth stocks. Your investment schedule is set, so you don't have to give too much thought to short-term price movements -- you'll be investing your set amount regardless.
You can't control what the stock market will do. The one thing you can control, though, is your discipline and consistency. It can be tempting to abandon growth stocks when the market is in a downturn and go all in on them when it's in a bull run, but you want to avoid that. Stay the course and trust that consistency will pay off.
