Shaping your portfolio

Deciding between growth and income

Several factors will determine the shape of your portfolio. The first of these is your investment objective. This takes into account whether you’re investing for income or for growth. If you want to generate income, perhaps to supplement your pension or salary, then you need to consider income-producing investments such as fixed interest or equity income funds. However, if it’s growth you’re after, then your portfolio could be more biased towards equities. Or, you may achieve growth by opting for an equity income fund and reinvesting the income.

Your attitude to risk is also important. How you decide between growth and income investments depends on your investment time frame and what you need the investment to provide for you. If you need a regular stream of income, you could focus your portfolio on assets that will help you achieve this, such as cash and bonds that will provide a fixed income. If you have a longer investment time period, or you do not need an immediate income, you could think about a larger allocation to growth-focused investments.

Whatever your preference, if you hold a variety of investments, both growth and income, you should be better prepared for whatever economic ups and downs might be ahead of you. As your financial situation changes over time, you should be prepared to make the necessary adjustments to your investment portfolio and switch from growth assets to income as your investment needs change.

Investing for income
The most popular forms of income investment are bonds (which are also known as ‘fixed income’ investments) and cash, both of which pay a regular, consistent rate of interest either annually, twice a year or four times a year. You can also obtain an income from shares in the form of dividends, and many equity funds are set up solely with the aim of generating a stable income.

Income stocks are most usually found in solid industries with established companies that generate good cash flow. They have little need to reinvest their profits to help grow the business or fund research and development of new products, and are therefore able to pay sizeable dividends back to their investors. Examples of traditional income-generating companies historically include utilities such as oil and gas, telephone companies, banks and insurance companies.

Investing for growth 
An investment grows in value when its price increases and you can sell it for more than you paid for it. The difference between the price you paid and the price you sell for is known as your capital gain.

Growth investments usually suit people who are willing to keep their money tied up for five years or more. The longer you leave your money invested, the greater the likelihood that you’ll get a significant capital gain when you decide to sell.

Investors looking to see their assets grow over time should think about investing in the stock market, which is generally considered to be the best home for a long-term investment.

Most growth stocks do not pay a dividend, instead preferring to reinvest the money back into the business to fund expansion or product development. While growth stocks can be volatile in the short-term, they can potentially generate greater returns over the long-term than income-focused investments. Many areas of growth tend to be subject to changes in investor sentiment, the technology sector being a good example of this.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.