3.4.2.1. Capital Appreciation vs. Income Management
Capital appreciation investing usually means a portfolio filled with non-dividend-paying common stocks that have large growth potential. An important advantage of this type of investing is that capital gains will not be taxed until the stocks are sold, lowering a customer’s annual tax bill. In addition, as long as the customer has a well-diversified portfolio and a long time horizon, the returns on growth stocks usually beat inflation and most other investments. A customer who desires capital appreciation typically has a long time horizon (younger or middle-aged), 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. A way to minimize this type of risk is to buy puts on a broad market index. A put is an option that grants the holder the right to sell shares of the index at a specified price.
Income investing usually involves fixed-income securities that offer periodic i