4.4.5 Capital Appreciation vs. Income Management
Capital appreciation investing usually means a portfolio filled with non-dividend paying common stocks that have large growth potential. These stocks usually have high P/E ratios. An important advantage of this type of investing is that capital gains will not be taxed until the stocks are sold, lowering a client’s annual tax bill. In addition, as long as the client has a well-diversified portfolio and a long time horizon, the returns on growth stocks usually beat inflation and most other investments. A client who desires capital appreciation typically has a long time horizon (a younger or middle-aged person), can tolerate risk and does not require regular income. The biggest risk facing a capital appreciation investor is market risk. If there is a large drop in the overall market, this kind of portfolio will take a large hit. As mentioned earlier, a way to minimize this type of risk is to buy puts on a broad-market index.
Income investing usually involves fixed-income securities that offer periodic interest payments. Fixed-