Many kept procrastinating entering the markets amid the pandemic and missed the bus. Stocks have shown one of the most remarkable recoveries since last year, gaining more than 75%. But as markets are trading at record high levels, is it prudent to throw in fresh money now?
Millionaire in a decade
Regular, disciplined investment in top-quality stocks for the long term should achieve the goal. It is not impractical to create a million-dollar reserve in a decade. But one needs to assume relatively higher risk to achieve higher growth. For example, consider a super-high growth stock Shopify (TSX:SHOP)(NYSE:SHOP).
It has delivered an average total return of 90% since 2015. To give you an idea of the enormity, the TSX Composite Index has delivered a mere 4% in returns in the same period. A $50,000 invested in May 2015 in SHOP stock would have made $1.2 million today.
Tech stocks generally grow at a faster rate, because of their growing markets and higher profit margins. However, they are riskier as well and exhibit greater stock price swings.
Note that high-growth stocks like SHOP would take comparatively lesser time to create a robust retirement fund and, thus, are worth the risk. At the same time, low-risk, dividend stocks, like utilities or consumer staple companies, would take much longer to create a similar amount of wealth.
Aggressive versus defensive stocks
For example, top utility stock Fortis (TSX:FTS)(NYSE:FTS) has delivered 10% average returns in the last five years. That’s way lower than Shopify for obvious reasons. It might take more than 30 years to make a $50,000 investment into a million-dollar reserve at this rate.
Fortis earns stable revenues, grows at an average rate, and pays decent dividends to shareholders. Companies like Fortis generally lag growth stocks because of their low-risk, low-return proposition.
However, those stable dividends can be of huge advantage in market downturns. Fortis pays a stable yield of 3.5%, in line with TSX stocks at large. Stocks like Fortis are slow-moving and have a low correlation with broad market indices.
So, the point is that your portfolio should be a combination of stocks like FTS and SHOP. Diversification does not end at investing in different stocks from different sectors. However, diversification is also investing in a blend of aggressive and defensive stocks.
A person with only a couple of years to retire most likely has a lower risk appetite. Thus, they will have a higher portion allotted to defensive stocks and less towards high-growth stocks like SHOP.
Bottom line
A person in their 30s will likely have a long investment horizon and be able to take higher risks. As a result, they can have a greater portion invested in aggressive stocks and less in slow-moving stocks.
There is no rule about allocating funds to aggressive and defensive stocks. However, investors can consider putting a regular amount in these quality stocks for the longer term. It would be highly heartening to have a seven-digit bank balance in your later years.
