books by Paul Petillo

on personal finance

In the world of personal finance, asking what’s the worst that could happen is not the same as asking: will I be able to afford this? or have I saved enough for retirement?

on retirement

If things are good, for some they won’t be good enough. If it turns out that things are not so good, someone will ultimately benefit for this off-chance negativity.

on mortgages

American dream or not, the games you may have once played with financing your home are not available for the vast majority of homeowners.

on investing

special features

on growth risk

Growth used to be the buzz word. Now it represents other more nefarious terms such as risk, chance, and possible loss of capital investment. To a company with an idea, a product or a whole host of services, growth represents the golden ring, the ability to make itself more attractive to investors, lenders, and potential buyers looking to integrate their businesses with another next new thing.

But growth depends on three elements: desire, trust and belief. In the mutual fund world, where growth represents potential or the fulfillment of projected expectations, you need more than the desire to build or offer something that consumers want now or will need in the future. It represents more than trust that the business plan laid out for investors and shareholders will be worthwhile and worth the risk. It also represents more than the belief that future markets will receive your notion warmly or knick-knack with open arms.

You might say that growth boils down to the ability to borrow. And you would not be incorrect in this assessment. Credit and the extension of current credit depends on the lenders embrace of a company’s desire, belief and trust. What else do they have to go on? New companies will rely on private capital to get up and running. But established companies, those that have gone public, need investors to shore up the desire of the management, trust that their directions are the right ones and the belief that if they hang on long enough, the rewards will be worth the investment.

Growth is risk and risk offers the potential for reward, and loss. So as we continue our discussion about investment risk, it is important to grasp the need for this. You cannot hide from this risk even if you tried to moderate the growth. As last year showed many novices and experts alike, growth can bite back.

But that is no reason to ignore the potential because you were once bitten. Shyness will result in two things. First, if you are in it for your retirement fund, shunning growth in favor of value (older, more established companies with dividends), bonds (the government issue type not the corporate or municipal kind), or worse, savings in traditional certificates or accounts, you will work longer. Growth is not just for the younger investor either. Older investors still need a portion of their portfolio in a growth focused fund (with the rest of the portfolio diversified in less risky investments).

And secondly, if you are in it for the investment, growth will provide the largest gains over the long-term. Long-term, for the sake of this discussion is a period of time lasting ten years or more and relies on the simple principle of dollar cost averaging (putting a fixed amount in each month during that period) to be truly successful.

Growth investment risk is not only necessary but will power the economy back to profitability — and yes, it will recover — help you achieve the rewards that accompany the risk. The problem with growth is the temptation to put everything into what is doing well and when the market corrects such speculation, it is the growth investors who feel it first. But when it recovers, it will be the growth investors who win first.

The lesson is diversification — always has been. But growth risk is a much needed ingredient — similar to flour in bread.