Investment Growth or Income

The whole point of investing is making money. That may happen if an investment grows in value or pays you income. But while growth and income may seem like equally appealing ideas, they aren’t interchangeable goals.

You may emphasize growth when you are investing to meet long-term goals. That way you’ll have time to weather a downturn in the markets and not have to change your plans. On the other hand, if you’re counting on cash from your investments to pay part of your living expenses or to meet short-term goals, you may be more likely to make income investments.

Another approach is to choose investments, typically dividend-paying stocks, balanced mutual funds, or equity income funds that may provide a strong total return. That’s the combination of growth and income.

Growth investments

You buy a growth investment anticipating that it will increase in value over time, though there’s no way to predict the rate of growth or the change in value. Shares of stock, shares in a mutual fund, and real estate (land and the buildings on it), are typical growth investments.

An investment grows in value when its price increases, and you can sell it for more than you paid for it. For example, if you buy 100 shares of stock at $8 a share, and its price goes up to $18 a share, you could profit from the growth in value. The difference between the price you paid ($800) and the price you sell for ($1,800) is your capital gain.

The risk you take is that the price will fall below the purchase price when you want to sell. That would result in a capital loss rather than a capital gain.

Income investments 

Income investments usually pay interest or dividends, depending on the kind of investment they are.

Interest is a percentage of the price of the investment. For example, if you buy a $1,000 bond that’s paying 5% interest, you earn $1,000 x .05, or $50 a year. Investments that pay regular interest are known as fixed-income investments, and include bonds, certificates of deposit (CDs), and similar investments.

The risks you take with bonds are that the issuer will default on its promise to pay or that the bond’s market price will fall, perhaps because of an increase in interest rates. Changing bond prices won’t affect you, though, if you hold the bond to maturity.

Which to choose

How can you decide between growth and income investments? Here are some things to consider, based on advice from investment experts:

Suit your choice to your goals. The longer your time frame, the more sense growth may make, since you can ride out cyclical downturns in the value of your investment.

Consider the tax implications. You can buy income investments for your tax-deferred retirement accounts and postpone paying taxes on those earnings until you withdraw from the account.

Balance your risk. If you have a variety of investments, you aren’t as vulnerable to the economic ups and downs that are sure to come.

Monitor your investments. As your financial situation changes, be prepared to adjust your investment portfolio to switch the focus from growth to income or vice versa.

 

 

 

 

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