True, portfolios need to be tailor made, yet our tip ratings are definitely prêt à porter. We hope they are useful, nonetheless. Here's what they mean.
Tip style: Growth
Where a company is expected to produce growth in sales and profits above the market average for the foreseeable future. This should translate into higher-than-average growth in earnings per share. Growth companies may not yet be paying dividends, though they should be generating substantial sales and, at least, be close to making profits. Typically, growth company shares – or funds that specialise in them – are for investors who can tolerate carrying substantial loss-making positions and are investing over a time horizon of many years.
Tip style: Value
Where a company’s sales and profits is likely to be market average at best, yet their predictability will be good. Such companies will almost certainly be paying dividends; the dividend stream will be reliable and the dividend yield will be above average. An exception may be where the real value of a company’s assets, after subtracting all liabilities, should be substantially more than the stock-market value of the equity. Typically, value shares – or funds that specialise in them – are for all investors, but especially those who want a regular income, have a longish-term investing horizon, but don’t want to run large losing positions.
Tip style: Speculative
In general, any investment that does not fall into the growth or value categories; often it will be a turn-round situation or one where a specified event is expected to realise value. As such, speculative situations are often short term. That said, investors who buy a company’s shares in expectation that the company will recover its lost performance – or who buy dedicated funds that specialise in recovery – will often need an investment horizon stretching to several years. So speculative situations are for investors who can tolerate carrying substantial loss-making positions.
Risk rating: High
Offers the potential to generate returns well in excess of the market average, though the chance of losses over the investment horizon is also high. Right for risk-seeking investors taking a long-term view
Risk rating: Medium
Offers the potential to generate market-excess returns. Returns are unlikely to be as good as on a high-risk investment, though the chance of losses is less. Right for all investors who want a balanced portfolio.
Risk rating: Low
Unlikely to generate returns above the market average, though the risk of loss should be market average. Right for cautious investors who don’t like carrying losses.
Granted, this is where we are at our most vague
Short-term: Six months or less – where we can spot the catalyst
Long-term: Anything over six months – where we can’t spot the catalyst