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By Charize Beukes*
When planning for retirement, it’s easy to feel overwhelmed by all the investment options that you hear you could or should be using. It doesn’t help that the world around us seems to be getting crazier, which affects how we think about and plan for the future.
And how do you plan for the future when it seems that market conditions and the future outlook changes every other day?
The tortoise and the hare of investing
Remember the story of the tortoise and the hare? The hare was fast and flashy but didn’t win the race. The tortoise moved slowly and steadily and came out ahead.
Translated into investment strategies, the rabbit can be compared to growth stocks that are exciting and full of promise, but also very volatile. The tortoise, on the other hand is like value stocks: less thrilling but reliable over the long haul.
Understanding these concepts can help you understand the value of each, and how you can use them grow your nest egg.
What are value stocks?
Value stocks are shares of companies that are solid and established but currently priced lower than what they’re really worth. Think of them as items on sale at your favourite shop—you get quality products without paying full price.
These stocks offer stable growth because these companies might not grow rapidly but have a track record of steady performance. Many value stocks pay dividends, which means you get regular income just for holding the shares. They tend to have fewer dramatic price swings, making them a calmer choice for long-term investors.
What are growth stocks?
Growth stocks are companies that are expected to grow faster than others. They might be newer or part of booming industries like technology – many of the big tech stocks fall into this category. While they offer the potential for bigger gains, they’re also more unpredictable.
These stocks carry higher risk because their prices can rise quickly but can also fall just as fast. They often reinvest earnings back into the business instead of paying dividends, so you won’t receive regular pay outs.
And they’re more affected by economic changes, which can lead to greater volatility.
The following graph shows that over the past 10 years, growth stocks did indeed produce higher returns over the long term. However, that graph line also highlights how much more volatile growth stocks are compared to value stocks.
Period: 10-Years
MSCI World Growth Index (% TR USD)
MSCI World Value Index (% TR USD)
The impact of lower interest rates
In the past week, the Reserve Bank and US Federal Reserve finally started to lower interest rates. This shift can affect both growth and value stocks in different ways.
Growth companies often borrow money to expand. Lower interest rates mean it’s cheaper for them to get loans, which can help them grow faster. When interest rates are low, future profits are worth more in today’s terms, making growth stocks more attractive to investors.
With lower interest rates, the returns on savings accounts and bonds decrease. This can make the steady dividends from value stocks more appealing to conservative investors.
Why a steady approach still matters for retirement
Even with interest rates decreasing, a steady investment approach remains important. Value stocks can offer more consistency and reduced volatility, providing a sense of stability, particularly for investors with lower risk tolerance. While growth stocks may outperform value stocks over the long term, they tend to be more volatile and are better suited to those with a higher tolerance for risk.
Dividends from value stocks may offer a regular income stream, which can be beneficial during retirement, though different strategies work for different needs.
It’s essential to remember that investing is not about chasing short-term trends or quick gains. While the current lower interest rates may make growth stocks appear more attractive, they can also carry higher risks, thus making it imperative to maintain a balance between growth and value.
Consulting your financial adviser is recommended to ensure your portfolio is balanced appropriately for your individual situation. A diversified mix of growth and value stocks is essential, though the ideal balance depends on your unique goals and financial circumstances.
And remember saving for retirement is a marathon, not a sprint. Lower interest rates can influence the stock market positively, but sticking with a prudent, steady approach is more likely to help you build a solid financial foundation. “Investing isn’t just about how high you can fly, but how smooth the ride is along the way.”
Ultimately, the goal is to enjoy your retirement years without financial worries. Slow and steady might win the race for you, too.
* Charize Beukes, CFP® is a financial advisor at Brenthurst Wealth Pretoria. [email protected]
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