Fintech company Upstart (UPST 2.76%) has been a roller coaster ride for investors since its Dec. 2020 initial public offering (IPO), and some would even call that description an understatement.
First, the stock seemed to do no wrong, surging more than 1,200% from its first day closing price in just 10 months. Then, a slice of humble pie was served up, and the stock plunged over 95% in the following year. Fast forward to 2023, and the stock was up close to 460% through Aug. 1. Then, in true "you never know what'll happen" fashion, Upstart's stock was sliced in half in just eight days.
Needless to say, it's been quite unpredictable.
Growth stocks and logical movements don't mix
Growth stocks offer a simple yet compelling investment case: Buy shares of promising companies, and you can outperform the market over time. Hit the jackpot with a growth stock, and the upside is virtually limitless. The chance for exceptional gains is enough to draw many investors to growth stocks, but Upstart's turbulent journey is a much-needed reminder that the path there is far from smooth and linear.
Remember that stock prices are determined by supply and demand with prices increasing when there are more buyers and decreasing when there are more sellers. A lot of the wild swings often seen with growth stocks can be explained by the fact investors are much more likely to jump in and out of them at the slightest sign of good or bad news.
With Upstart, for example, second-quarter revenue beat analysts' expectations, but its guidance for the third quarter was lackluster. That in itself was a key reason why the company lost a third of its value in one day after reporting earnings. No matter how seemingly insignificant something is to a company's core business and long-term value, you never know how investors will receive it and act.
Patience is the name of the game
While it's much easier said than done, investors should approach growth stocks with a long-term mindset and the ability to stomach the inevitable swings.
Between social media and 24/7 accessible news and reports, it's far too easy to get caught up in the short-term noise surrounding a stock (both good and bad). As long as the long-term results are there, what happens along the way becomes irrelevant. You almost have to treat it like horse blinders and purposely limit your distractions.
Think about growth stocks like Amazon, Alphabet, and Apple, which have all had wild price swings over the past decade. Do you think investors over that span should care about those price swings or the fact these companies have produced remarkable returns for the period?
Data by YCharts.
If you're in it for the long haul (which you should be), focusing too much on the short-term volatility of a growth stock will only cause unnecessary stress.
Be proactive in preventing missteps
With how fast growth stocks can surge or plunge in a short period, it can be tempting to try to time the market. A lot of investors, including myself, are guilty of this. However, history shows this is generally counterproductive and can do more harm than good.
If you're interested in growth stocks, a good strategy to embrace is dollar-cost averaging. When you dollar-cost average, you decide on a set amount you can invest and then choose predetermined times to make those investments. For example, you could decide to invest X amount every other Friday or on the first of every month.
The key to dollar-cost averaging is sticking to your investing schedule no matter what. Sometimes, you'll invest when prices are high; other times, you'll invest when they're low. The idea is that, over the long run, the highs and lows will average out (hence the name) and reduce the impact of market volatility.
Dollar-cost averaging also prevents a situation where you invest a lump sum right before a stock drops. Imagine investing $10,000 into Upstart before its Q2 earnings, only to see your position lose thousands within a day or two. That can be discouraging for a lot of investors, long-term or not.
Don't get sidetracked from your long-term goals
Many investors have a preference for stock types, whether it's growth, value, or income. For investors interested in growth stocks, it's important to remember they should be part of a well-rounded portfolio. Despite how promising growth stocks can be, they can also be just as devastating. You don't want your portfolio relying entirely on the high-risk, high-reward nature of a handful of companies.
Having a long-term mindset and keeping your eyes on the prize can help mitigate these risks and put yourself in a position to reap the benefits that can come with growth stocks.
