Growth stocks haven’t exactly been stellar performers of late. A large number of these enterprises tend to be unprofitable or reliant on external financing, neither of which is a desirable trait when interest rates are on the rise. This is especially true for tech stocks that have been hit especially hard since their peak in October 2021, with some falling as much as 90%!
Looking at the performance of Cathie Wood’s ARK Invest portfolio, her loss over the last three years is a whopping -56.1%!
For some investors, this level of volatility is unacceptable. And a golden rule of investing is to stick to a personal level of risk tolerance. However, those willing to endure a rollercoaster ride in valuations may find that growth stocks could be some of the best investments to make right now.
Capitalising on recovery tailwinds
A stock market recovery is coming. I can say that confidently because the stock market has a perfect track record of bouncing back from the direst of financial circumstances. And many previous crashes and corrections were far more severe than the challenges we face today.
Just like how growth stocks are typically hit the hardest during a bear market, they also usually outperform during a bull one. And when a recovery is underway, it’s not uncommon to see share prices begin to climb rapidly from these types of enterprises.
That’s why investing in growth could be the perfect way to position a portfolio to thrive throughout the next bull market. Of course, when that might take place is anyone’s best guess.
Investing during volatility
The economic outlook for the UK is improving with each passing month. But we’re not out of the woods yet. And with winter approaching, rising energy bills may reverse some of the progress made in the fight against inflation. In fact, we’ve already seen early signs of this happening, with inflation staying flat at 6.3% in September.
Since uncertainty and investors go together about as well as oil and water, growth shares may continue to slide in the face of bad economic news. As such, even if an investor identifies Britain’s best growth company with a rock-solid balance sheet and fantastic long-term potential, buying shares today could still result in losses in the short term.
Of course, should sentiment improve, current valuations may be as good as they’ll get. And by not snapping up shares, investors could be leaving an enormous amount of money on the table.
So what’s the right move? This is where pound-cost averaging enters the picture.
Instead of throwing all my spare capital into the stock market in one giant sum, I systematically drip-feed it across the most promising growth opportunities. While this does result in higher trading fees from increased transactions, it enables me to purchase more shares should valuations continue to tumble.
