4 Disadvantages of Growth Investing

Growth investing can provide investors with a number of unique benefits and solid returns. However, there are several disadvantages that you will need to know about before getting involved with growth investing. Here are some of the disadvantages of growth investing.

1. High Volatility

One of the biggest advantages of this type of investment is that it has extremely high volatility. Most companies that appear poised for growth could also lose a substantial amount of value quickly. When examining these companies, you will find that they have a high price-earnings ratio. As an investor, you have to have a high tolerance for risk and understand that the value of your stock could decrease suddenly based on nothing more than market sentiment. This is not an investment for the faint of heart.

2. Substantial Research

Another potential problem with growth investing is that you have to do a substantial amount of research about stocks before you can invest in them. If you can accurately identify a company that is poised for growth, you could bring in a great return. However, identifying the profitable companies is easier said than done. In order to do this, you are going to have to do a substantial amount of research and have a good understanding of how to use valuation multiples. There are some indicators that you can use in order to identify patterns of growth in a company. This is going to require you to learn how to do this type of research and how to perform the right calculations. Many people think that they are doing an adequate amount of research when they are really fooling themselves.

3. Long Term

Another disadvantage of this type of investment strategy is that it is definitely a long-term strategy. If you are the type of investor who likes to realize immediate profits and to day trade, this is not going to be the strategy for you. In order to truly realize a good profit from a growth stock, you are going to have to be prepared to hang onto it for the long term. In most cases, experts recommend that you keep growth stocks for least five years before selling them. If you do not, you might time the market wrong and find out that you sold at the wrong time.

4. Choosing the Wrong Company

Another problem that comes up with this type of investing is when you choose the wrong company to invest in. You might think that a company is poised for growth when really they are about to be run into the ground. The problem arises when the price of the stock starts to fall. You might think that since this is a growth stock, you should simply hang onto it for the next five years before selling. The problem is that it can be difficult to differentiate between a company that is going out of business and a growth company that is just extremely volatile.

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