Finding The Right Stock Portfolio Balance | Learn How To Mix Value Stocks, Growth Stocks And Income Stocks in Singapore
Stock market traders are generally after profits and investment income when buying or selling stocks. The primary objective is to “buy low and sell high” to gain profits. They also pick dividend-paying stocks to collect extra to boost income.
However, the rewards can be exponential if you have an ideal mix of value stocks, growth stocks, and income stocks in your stock portfolio. But the secret is to know when to use them to gain the upper hand.
Stocks are not simply shares of publicly-listed companies in the stock exchange. Old hand traders have classified stocks into three categories namely: value, growth, and income.
Investors who have a fairly good grasp of the market know the characteristics of each type and utilize that knowledge to efficiently manage their portfolios and build wealth.
- Value stocks
If you seek advice from value investors, they will suggest that you look for stocks of companies that are currently trading below their intrinsic or real value. In effect, you will have to scout around for “undervalued” stocks with strong potential for future profits.
Generally, a value stock is a “hidden gem” so to speak. The stock price of a company in good financial health may be experiencing a downturn that has nothing to do with fundamentals. Sometimes the price movement is not consistent with the technical patterns.
Negative publicity or perception can trigger a temporary price drop. A controversy involving a company top brass can also impact on the stock. But in due course, the price could rebound and seek its own level.
Typically, the stocks of large-sized, established and long-standing companies fall into this category.
Low Giau Kim, the Assistant Director of Investment Advisory at iFAST Global Markets, noted that while value stocks can often provide long-term profits, there is a risk that “their prices do not always return to their previous higher levels as expected, or within a time frame as expected, thus investors could still be holding on to these under-value stocks at a longer than expected time frame”.
- Growth stocks
Growth stocks are referred to as “high-flying” stocks. Stock investors at Wall Street in the U.S. are infatuated with the so-called FAANG stocks. These are the tech giants and internet kings composed of Facebook, Apple, Amazon, Netflix, and Google.
By the term alone, growth stocks are those companies exhibiting extraordinary growth potential in the foreseeable future. When analyzed, growth companies are seen growing at a quicker rate or wilder pace than the overall markets.
The sector may not necessarily be in technology but also in renewable energy, biotechnology or other newer industries. There is a growth company in every sector but they usually dominate in the sectors mentioned. Most of these companies offer innovative products and are constantly in expansion mode.
In the near future, growth companies are geared to create a stir in the market. Newer companies with excellent business models and run by able managers will capitalize on the demand for their products and services.
Although the return on your investment can go sky high, many start out with small capitalization and are less stable. These stocks are susceptible to drastic price declines.
- Income stocks
If you are a middle-of-the-road investor, income stocks are the best choices for you. Income stocks are attractive because these are dividend-paying stocks whose yields or rates are higher than bonds, treasury notes or certificates of deposits and inflation too.
You can be assured of guaranteed, fixed-income through regular dividend payouts. It is not difficult to identify income stocks. There are several well-established firms in Singapore that have a good track record of consistently paying competitive dividends.
“Investors who prefer to grow their capital via receiving these dividends over a longer time horizon could consider income stocks in their portfolio,” said Low Giau Kim, iFAST Global Markets. “The risk, of course, is that these yields are high possibly due to considerable uncertainty as to whether the dividends can be maintained especially those companies with declining earnings or those that could be struggling in an unpopular or “sunset” industry with little future. Therefore, investors of these income stocks could face capital losses should they liquidate the stocks in the future.”
Looking for the right strategies
If you’re looking for strategies on what type of stock to pick that is aligned with your investment objectives, here are some tips:
- Think “undervalued” when going for value stocks. Before you purchase them, you need to perform a fundamental analysis of the company. It entails hard work but it will develop your analytical skills when reviewing financial and non-financial data.
Your analysis will help you determine whether the company is operating a highly profitable business. The premise is to buy at a bargain or lower than the intrinsic value then sell when the price adjusts higher and closer or back to its real value.
Once you have a good reading of the company’s strength, timing the purchase is crucial. You need to be a step ahead of other investors and cash in when the time is ripe to unload and realize profits.
- Approach growth stocks with caution. The objective of growth investors is to capitalize on the constant price changes and ride on the momentum.
Growth investors target less-known companies that have plenty of room for growth and belong to growing industries. They buy the stocks at the early stages of growth when it is on the verge of an uptrend. The ride on the first wave will bring the stock price to a meteoric rise. Then the selling occurs at the peak of the wave.
Since growth stocks are more volatile and quite risky, you might lose your investment if you’re not hands on. You need to personally monitor the stock because it’s not a long-term hold. The opportune period to sell is shorter. Otherwise, you will miss the opportunity of a handsome windfall.
- Income stocks are suited for passive investors who are patient and skewed to the safe Blue-chip stocks with consistent performance are examples of income stocks.
Unlike value or growth stocks, income stocks won’t demand strict monitoring. Usually, investors of income stocks are those who want to stay invested in the stock market but lacks the time or skills to do active trading. It’s a convenient strategy to own a blue chip stock.
The company is established and with a solid foundation. Even if it’s a long-term hold, you will receive passive income through the regular payments of dividends. Review the promised dividend yields of each dividend-paying stock so you can calculate the expected income when collecting period arrives. This is a laid-back strategy with less pressure.
How do the professionals invest in these types of stocks?
At boutique fund house DCG Capital, TJ Tan pointed out that the DCG Asia Value Fund invests in all 3 categories. “But we require that they are all trading significantly below its intrinsic value. They could be asset stocks, undervalue growth stocks or stocks that pay out sustainable cashflows from their operations.” Learn more about the fund here.
“There are times where one category may become very overvalued and you may need to sell them and rebalance your portfolio,” says Tan.
“I think what’s important is knowing who you are and what kind of investment style suits you and going with that. There’s nothing inherently good or bad in investing in any particular type of stocks,” says Sean Cheng, Portfolio Manager at Providend.
“The investment philosophy that we operate with at Providend is to invest based on evidence. While our portfolios are invested in all three types of stocks, they are tilted toward value stocks, small companies, and companies which exhibit profitability as the empirical data across decades indicates that such portfolios have a higher expected return. That evidence-based approach works very well for us and for our investors.”
Know the characteristics of the stocks
The Stock Exchange in Singapore or SGX has about 700 stocks that are actively traded. As a stock investor, you’re not expected to know them all by heart. In order to simplify the selection process, you can start filtering the prospects based on 6 key factors.
Evaluate the stock based on 1) industry/sector; 2) business model; 3) management team; 4) growth indicators, either the stock price or dividend; 5) company stability (check the debt-to-equity ratio); and 6) valuation through price per earnings).
All the required data and information is readily accessible. The important thing is to know the characteristics of the stocks. They can be value, growth, and income stocks. You have the liberty to mix them to find the right brew.
“Personally, a more crucial question to address has to do with the investors’ investment objectives, investment horizons and risk profiles – these are often times regardless of their age profiles,” says Low Giau Kim, iFAST Global Markets.
“For example, investors with conservative risk profile i.e. with capital preservation as their investment objective and have little or no appetite for even moderate levels of paper losses are inclined to invest predominantly in income stocks with fairly stable stock prices, and so forth.”
“Furthermore, investors’ competence i.e. the necessary skills, knowledge and attitude or personality that is developed over time to identify, trade, monitor, evaluate and make buy-sell adjustments also play a part in establish the make-up of their investment portfolio. Assuming efficient market information and armed with the right tools to screen and evaluate these information, a very experienced and competent investor could be very comfortable just investing purely in growth stocks or value stocks.”