You've saved your money, done your investment research and now it's time to invest, but what kinds of funds should you invest in?
As a result of the division of investment companies into those whose prime object is income and those that stress capital gains, investors have perplexing problems of choice. "Growth funds" have become the popular designation of those whose policy emphasizes investment in stocks promising the greatest capital appreciation. Income is secondary. E. W. Axe, investment company manager, in discussing growth stocks, warned of the danger of projecting long-term trends based upon the past and pointed out that the price one must pay for a security is always very important; "The stock of the best company can be too high to be a good long-term investment."
The expected greater rise in the price of the lower-yield stock follows from the fact that the industry is more dynamic, the expectation being that the future rise in earnings of the company will be more rapid; or the dividend pay-out (the percentage of earnings paid in dividends) has been so low that a large increase in dividends may be expected, whereas the dividend pay-out in a high-yielding stock has been so high that the present rate is regarded as a maximum for the foreseeable future.
The market may alter its valuation of earnings. In other words, because an industry or a company is more favorably regarded, each dollar of earnings may now bring a larger price than formerly. If an investment management is successful in anticipating such changes, the advantages of growth may be obtained without any actual growth in earnings having taken place.
Recently, it has been preferable to own "growth" rather than "income" funds. The difference in income, i.e. income derived from dividends, has been more than compensated for by the rise in stock prices, and this, in turn, has been reflected in the relatively faster rise in the net asset value of the shares of growth funds.
Should every prospective investor therefore cast his lot with growth funds in preference to those whose policies are directed toward emphasis on "pure" income? The writer would answer, "No," unless the investor thoroughly understands the facts that will now be discussed.
Nothing can alter the fundamental difference between income derived from dividendsdividends that can be counted on year after year, in the mainand gains derived from the sale of securities at prices higher than purchase prices. The former dividend income is recurring (with some variations due to changes in the business cycle), whereas dividends of the latter variety are by their nature uncertain and the product of unpredictable factors. Investment thinking is actually dominated by the tendency to project into the future what has happened in the recent past.
In 1929, the tendency would have beenas it wasto belittle income; in 1939, capital gains would have been given lesser consideration. Even in 1949, with common stock prices still far below the level of twenty years earlier, growth had not yet captured the imagination of investors, as it did after the Korean War and after the realization that the welfare state, or mixed economy, was not to be temporary. Investors still must learn the difference between economic growth and rising stock prices due to the raising of expectations and special factors.
In the end, the great unknown is the long-term growth of stock prices. No one knows how rapid the gains will be. The best efforts at economic analysis are full of qualifications. Superimposed on economic analysis, if the projections are assumed to be correct, are the evaluations placed by investors on earnings and dividends. These evaluations are determined by both psychological and political elements.
Basically, economic analysis is still a human endeavor, and thus is flawed like humans themselves. The best bet is to educate yourself and find a trusted adviser who can help you weather the storm when the market falls and pop the champagne when your investments grow.