Financial advisors characterize investors as belonging to one of three types; there are those who invest to generate an income, those who invest in order to grow the value of their capital, and those who aim to strike a balance between the two objectives. Growth investors, generally, are not interested in short term income, but in long term capital gains, and that objective affects their investment style and the asset classes in which they invest.
For instance, growth investors often have a much lower percentage of bonds in their portfolio than income investors. If they do invest in bonds, they’ll probably look for junk – non investment grade bonds whose prices will increase if the issuer is re-rated, giving them a profit.
They’ll have a bigger investment in the stock market, and in particular they’ll look for exposure to growth stocks – companies which are growing well above the average rate. So they’ll typically buy start-up or high growth tech stocks, particularly those with disruptive technologies which could take high market share. They’re not particularly worried if the company doesn’t pay a dividend. Long term growth investors will have moved from Microsoft and Oracle on to Amazon and Google, and now they’re investing in Netflix and Alibaba – always looking for the next big thing.
Long term REIT Investments
Because they’re primarily interested in growth, they’re often willing to pay high valuations for stocks they believe will outperform. The rewards can be high, but they are also running a high risk; if a growth stock puts out a negative earnings announcement, the market can savagely down-rate the shares.
To take the edge of their portfolio’s risk they might want to think about placing a good proportion – from 10-30% – in long term REIT investments. REITs are usually thought of as an income investment, but because they invest in real estate, they can also deliver a significant capital gain. However, growth investors would probably want to buy different REITs from those that most appeal to income investors.
For instance, data center REITs are showing strong growth, as are REITs investing in manufactured homes. Both are helped by long term trends – data center REITs by the trend towards e-commerce and Big Data, and manufactured housing REITs by increased residential prices and decreasing affordability for lower income families. Growth REITs might also include Host Hotels (HST), Vornado (VNO) and Pennsylvania REIT (PEI).
Real estate tends not to correlate with stock market returns, so that this REIT holding should help to protect the portfolio if the market falls. At the same time, because REITs have stable long term income flows coming from rental payments, they have robust business models and are likely to remain solvent during a downturn (though they were severely challenged in 2008-9, few actually went bankrupt).
Growth stocks will be at the heart of most growth investors’ portfolios – but it’s well worth looking for some protection, and REITs can help provide it.