Benefits and risks of investing in growth stocks
The benefits of investing in growth stocks include:
- High potential returns.
- Less demand for immediate capital returns allows management to invest in the future.
- They can diversify your portfolio across market segments and sectors.
- Participate in major economic trends.
- One excellent growth stock investment can make up for a handful that don't work out.
The risks of investing in growth stocks include:
- Greater price volatility could mean prices don't reflect the value you believe the company presents.
- High expectations leave more room for disappointing earnings results.
- Less predictable than value stocks.
Methodology
The above stocks were chosen because they exhibit very high growth potential in sectors benefitting from secular growth trends. They also present very strong competitive moats, stemming from the network effect, scale advantages, and/or high switching costs for their products and services. As such, they should produce strong earnings growth for years to come, producing excellent investment returns based on their current valuations.
Should you invest in growth stocks?
Growth stocks aren't for everyone. They can be much more volatile than other stocks. What's more, it requires paying close attention to the underlying trends driving results for a company, whether that company remains best positioned to execute on the potential growth, and assessing the market's expectations relative to your own expectations for the business.
Growth stocks can become too expensive even with their upside potential. If market expectations exceed reality, it's time to search for better opportunities.