Growth, Growth & Income, Aggressive Growth, International & Mutual Funds…Why?
If you listen to Dave Ramsey enough you will have heard these four asset classes mentioned when he talks about investing. Dave stresses diversifying across these four asset classes and using mutual funds to diversify across many different companies. We could not agree more. In the article below I will define each of these and then discuss a few reasons why we do this.
When Dave talks about growth companies he is specifically talking about Large Growth companies. These companies are focused on growing the market share of their business and thus increasing their stock price. Instead of satisfying shareholders with dividends (share of profits) they take those revenues and re-invest in the company. Amazon, Apple, Tesla, and Google are a few examples of Large Growth companies.
Growth & Income
Growth & Income is often referred to as Large Value. A value company satisfies its shareholders by issuing dividends to shareholders. A company with a good dividend yield will create value for its shareholders without necessarily rapidly growing its stock price.
Aggressive Growth companies are defined as companies in the mid-cap and small-cap areas that have considerably less market capitalization than large-cap companies. Market capitalization is the value of a company. To get the market capitalization of a company you simply multiply the current share price by the number of outstanding shares. Large-cap companies have a market capitalization of $10 Billion+, mid-cap companies have a market capitalization between $3 Billion and $10 Billion, and small-cap companies have a market capitalization of less than $3 Billion. Aggressive Growth companies typically carry more risk because the companies within this category are not as established as large-cap companies. At the same time, smaller companies tend to have a higher opportunity for rapid growth.
International companies are exactly what it sounds like…International. For us, in the United States, this means companies that are wholly located outside of the United States. One common mistake investors and even some advisors (not Whitaker-Myers) make when choosing a fund for their international exposure is choosing a “global fund”. Why is this a mistake? Because, unlike international funds, a global fund also includes companies in the United States. This means you are not truly diversifying outside of the USA when you pick a global fund and coincidentally skew your asset allocation.
A mutual fund is a collection of companies built into one investment. While individual stocks have their own share price, a mutual fund also has a price to buy into the mutual fund. When you buy into a mutual fund you are subsequently purchasing every stock within that fund. Stock mutual funds hold many different stocks and every mutual fund has its own investment strategy. There are even bond mutual funds, commodity mutual funds, real estate mutual funds, and more. There are about 8,000 mutual funds to choose from. At Whitaker-Myers Wealth Managers we have very specific criteria to filter through the clutter and narrow down these 8,000 funds to about 30 that we would consider to be relevant investments for our clients. The advantage of using mutual funds in investing goes back to the broad diversification of assets. If you have a portfolio with four individual stocks in it and one of those companies file for bankruptcy then your investment immediately loses 25% of its value that you will never recoup. On the other hand, if you have a portfolio with 400 companies and one files for bankruptcy then the negative impact on your overall performance is much less.
As the title says “Smart Investors Diversify”… First, take the four asset classes defined above (Growth, Growth & Income, Aggressive Growth, International). Each of these asset classes grows at different rates in any given year. One year, Growth might be outperforming all other asset classes which has been the case for several years until now. Right now, even with the stock market down, Growth & Income stocks are performing the best (or the least bad). So, let’s take all our money and buy dividend stocks right? Wrong. Trying to time the market is a fool’s errand. The secret is time in the market, not trying to time the market. If you try and guess which asset class will perform the best at any given time then a 10% return could start to look like 5% and over a long period of time this can have a monumental impact on the final value of your portfolio. Instead, buy a little of everything and let it grow over a long period of time. Using these four asset classes we can allocate 25% to Growth mutual funds, 25% to Growth & Income mutual funds, 25% to Aggressive Growth mutual funds, and 25% to International mutual funds. Your financial advisor at Whitaker-Myers Wealth Managers can build a portfolio custom-tailored to your needs that incorporates broad diversification across these four asset classes. This is a great strategy for investors looking to maximize the potential growth of their portfolio while lowering the risk of being too heavily concentrated in individual companies or asset classes. Keep in mind that there still is risk involved in all investments and you should speak to your advisor before attempting to implement this or any investment strategy.
If you have questions about anything covered in this article, reach out to one of the Advisors here at Whitaker-Myers!
SMART INVESTORS DIVERSIFY
September 10, 2022
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