Investors may be tall or short, male or female, black or white. The possibilities seem endless. However, we tend to categorize them as growth investors, income investors, or capital preservation investors. As a practical matter, 99% of investors are either growth or income. (Most capital preservation investors leave their money in FDIC accounts.)
Generally speaking, the appropriate investments for each type of investor are very different. For growth investors, we buy them lots of tech stocks, for example, or stocks that produce no income but are expected to appreciate substantially in value. Of course, they may also depreciate substantially during the inevitable bear markets.
Traditionally, we buy lots of bonds for income investors, because most bonds pay interest income to our income investors every quarter. With interest rates so low currently and with bonds expected to lose so much value when interest rates finally start rising, we now buy high-dividend stocks for income investors instead of bonds. Like Willie Sutton admitted to robbing banks "because that's where the money is," we buy high-dividend stocks because that's where the income is. But, these stocks behave somewhat like bonds. Their values do fall somewhat when interest rates rise, and their values don't rise as much as growth stocks during a bull run. There is also solid research that they don't fall as much as growth stocks fall during the inevitable bear markets.
This polarity in investment objectives actually works quite well, except for one problem. Income investors are unhappy when the market is rising, because their portfolio is not increasing as rapidly as the portfolio of growth investors. They feel bad at cocktail parties. Conversely, growth investors are unhappy when the market is falling, because their portfolio is falling more than the portfolio of income investors. They also feel bad at cocktail parties -- but not at the same time as income investors feel bad. They alternate feeling bad!
Income investors are happy during the inevitable bear markets, because their income remains relatively stable despite falling stock prices. But, just try to remind income investors of that right now, after a great bull run!
Because people are people, they want to be growth investors when the market is going up and to be income investors when the market is going down, which is like having your cake and eating it too.
Bottom Line: Investors are people too, and that's why I love them . . . pimples and all.
Generally speaking, the appropriate investments for each type of investor are very different. For growth investors, we buy them lots of tech stocks, for example, or stocks that produce no income but are expected to appreciate substantially in value. Of course, they may also depreciate substantially during the inevitable bear markets.
Traditionally, we buy lots of bonds for income investors, because most bonds pay interest income to our income investors every quarter. With interest rates so low currently and with bonds expected to lose so much value when interest rates finally start rising, we now buy high-dividend stocks for income investors instead of bonds. Like Willie Sutton admitted to robbing banks "because that's where the money is," we buy high-dividend stocks because that's where the income is. But, these stocks behave somewhat like bonds. Their values do fall somewhat when interest rates rise, and their values don't rise as much as growth stocks during a bull run. There is also solid research that they don't fall as much as growth stocks fall during the inevitable bear markets.
This polarity in investment objectives actually works quite well, except for one problem. Income investors are unhappy when the market is rising, because their portfolio is not increasing as rapidly as the portfolio of growth investors. They feel bad at cocktail parties. Conversely, growth investors are unhappy when the market is falling, because their portfolio is falling more than the portfolio of income investors. They also feel bad at cocktail parties -- but not at the same time as income investors feel bad. They alternate feeling bad!
Income investors are happy during the inevitable bear markets, because their income remains relatively stable despite falling stock prices. But, just try to remind income investors of that right now, after a great bull run!
Because people are people, they want to be growth investors when the market is going up and to be income investors when the market is going down, which is like having your cake and eating it too.
Bottom Line: Investors are people too, and that's why I love them . . . pimples and all.
