Capital Growth Can Quickly Run out of Steam
A major investment objective that investors aim for is always capital growth. With the current state of the economy, this is the most popular, but also the most difficult goal among investors today. A capital gain is achieved whenever the original item is resold above its purchase price. Profit is always the purpose of a growth investment where regular income is a secondary consideration from growth stocks, commodities, or raw land.
With a growth stock or raw land, the investor receives low or no yield, but the possibility of an increase in value. One such example could be a company show definite signs that its earnings are on the upswing, but management has decided to reinvest most of them in new equipment instead of paying increased dividends to shareholders. The results are good growth prospects and very low yield. Sound familiar?
Another example you could look at, let’s say you buy some undeveloped land on the out-skirts of a fast expanding metropolitan area. The yield will be zero, because you’re collecting no rent, but the prospects for growth will soon be promising. The only thing is when you sell the land for a profit or develop it as income property you will receive a capital gain, but at a lower value due to the current economic downturn.
If you are willing to forgo present income for the sake of possible increase in the value of your funds in the years to come, then I strongly suggest a growth investment. The difference between income and capital gain is very obvious during a recession or depression. Income is normally received regularly, while capital gains are much more uncertain and can be realized only when you sell. The difference in time pattern of return is critical to your objectives as an investor. If you rely on a definite amount of return, you will need this for your present consumption. Capital gains, however, are for acquiring wealth for future consumption.
The safety/income/growth (capital gain) choice is not a 1 out of 3 decision. Selection is a matter of emphasis. Many securities offer you a combination of two needs, playing down the third. It may be necessary for you to choose a mixture of investments.
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