Managing Risk in your Growth Bucket

Written by: Andrew Briesacher – Wealth Manager

The Stock Market can certainly be a difficult place to navigate. At Wheelhouse, we believe that all investments can have their place as long as you understand the differing risk and potential returns that specific investments entail.

When considering investments in the growth bucket of your portfolio, it’s essential to understand the different sizes and styles of companies and how they can affect the fluctuations in your portfolio.

Here’s a breakdown:

Sizes of Stocks

1. Large-Cap Stocks:
   • Market Capitalization: Typically over $10 billion.
   • Characteristics: Established companies with a history of holding up during market cycles and potentially paying dividends. Examples include major corporations like Apple and Microsoft. These types of companies are usually considered the more stable areas of the market and are associated with  well-known indexes like the S&P 500 and the Dow Jones Industrial Average.

2. Mid-Cap Stocks:
   • Market Capitalization: Between $2 billion and $10 billion.
   • Characteristics: These companies often have growth potential and can be more volatile than large caps. They tend to balance growth and stability.

3. Small-Cap Stocks:
   • Market Capitalization: Between $300 million and $2 billion.
   • Characteristics: Higher growth potential but also higher risk. Small-cap stocks can be more sensitive to economic changes as seen recently by the rising interest rate environment of 2022-2023. Over the long term, these areas of the market can be highfliers but also have the potential to drag down your portfolio further during market corrections.

Styles of Stocks

1. Growth Stocks:
   • Characteristics: Companies expected to grow at an above-average rate compared to their industry or the market. They typically reinvest earnings into the business rather than pay dividends and many times can be highly leveraged, meaning they bower money to keep their liquid capital up with their expected Growth rates. Examples can include tech startups and biotech firms.

2. Value Stocks:
   • Characteristics: Stocks that appear to be undervalued based on fundamentals (e.g., low price-to-earnings ratios). These companies may pay dividends and are often more established. Examples include traditional retail companies like Coca-Cola and Wal-Mart or utility companies like AT&T.

3. Dividend Stocks:
   • Characteristics: Companies that return a portion of their profits to shareholders as dividends. They tend to be more stable and are attractive for income-focused investors. Examples include established firms in consumer goods like Johnson & Johnson and Phillip Morris/Altria or utility companies like Ameren. There can be a lot of overlap between Value Stocks and Dividend Stocks.

4. Blend Stocks:
   • Characteristics: Blend stocks tend to have a mix of growth, value and dividend paying characteristics. These stocks may offer a balance of capital appreciation and income potential. There are also many mutual fund and ETF investments that will combine these many types of companies all into one investment.

Investment Considerations

• Risk Tolerance: Understand your comfort level with risk, as small-cap and growth stocks can be more volatile.
• Investment Goals: Align your stock and ETF choices with your investment horizon and objectives (growth, income, etc.).
• Diversification: Consider a mix of sizes and styles to abate risk and increase potential returns while continually rebalancing and adjusting your allocation over different market cycles.

At Wheelhouse, we tend to view investing in individual stocks as a home run hitting type of strategy, where we use indexed ETFs as a risk managed approach for hitting singles and doubles when investing the “at risk” money of the portfolio. Remember, anything invested in the market, needs to be planned for longer term and requires regular monitoring and rebalancing to make sure the risk level stays appropriate.

A properly diversified growth portfolio should have allocation to all these types of companies. Often, we have clients point out that a particular ETF or area of the market was the “best performer” over the last year. When this happens it’s good to be reminded that very few times is a certain area the best performer two years in a row and the best recommendation should be to rebalance your portfolio to take some of those profits off the table.

Wheelhouse does not believe in day trading the portfolio but rather a long-term approach where we make tweaks and adjustments along the way to our growth strategy. Even when changes aren’t being made to the allocation, our advisory team will meet regularly to discuss the allocations and any changes in the market landscape we need to be aware of.

If you have any questions about the growth investments in your portfolio, or how we at Wheelhouse determine the sizes and styles of companies to use, please give us a call.