This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Between rising interest rates, a potential recession on the horizon, and a bear market in full swing, it's a fraught time to be an investor. And that's especially true for those who prefer to buy growth stocks, which have been hit significantly harder than the market as a whole. The market-tracking SPDR S&P 500 ETF Trust (NYSEMKT: SPY) is down by more than 11% over the past 12 months, while the large-cap SPDR Portfolio S&P 500 Growth ETF (NYSEMKT: SPYG) is off by around 18% in the same period.
So should investors shy away from expansion-phase companies for a while, seeing as how conditions appear to be poor for them in the present and likely tenuous in the near future? The answer depends on your goals for investing, the riskiness of the stock you're thinking of, and -- last but not least -- your own mental fortitude, so let's break these issues down individually.
Determine your time horizon
Before you can answer for yourself whether it's appropriate to be buying growth stocks right now, you'll need to figure out how long you want to hold your shares. Another way to frame that question is to ask when and why you'll need to take out the money from your investment.
If you think you might need your funds back into cash within a couple of years, you probably shouldn't be buying any type of stock, as it could take longer than that to reach the price level where you bought the shares. In contrast, if you're investing for the long-term (and you should be), it could still be a good time to buy, but there's more to the story.
By definition, growth stocks are backed by growth-phase companies that often aren't yet focused on profitability and that are too immature to consider giving capital back to shareholders. In practice, that means if you decide to sit on the sidelines instead of buying shares, you could be missing out on a significant run-up as businesses expand quickly over time. It's also possible that you could be sagely dodging a catastrophic collapse in share prices caused by any of the many headwinds in force right now.
It isn't possible to determine which of those two outcomes are going to occur in advance, but you can improve your chances by being picky about which growth stocks you invest in and how much of your capital you choose to commit to them. And if you can do that, now's a decent time to be buying.
Allocate your risk budget conservatively
Being careful with your investments amid the ongoing economic uncertainty means favoring growth companies that are likely to weather the turbulence with grace and avoiding those that won't.
For example, Vertex Pharmaceuticals Incorporated (NASDAQ: VRTX) develops medicines for rare diseases like cystic fibrosis. It'll keep performing clinical trials and commercializing drugs regardless of a recession, and its patients will need to keep buying its therapies (or getting their insurers to pay) no matter what. Plus, rising interest rates don't threaten it much at all, because it's profitable, expanding its top line consistently, and it also generates enough free cash flow to avoid needing to habitually borrow money. And it's currently shrugging off the bear market without breaking a sweat, with its shares rising by nearly 28% so far this year in comparison to the market's fall of 19%.
So, Vertex looks to be a growth stock that's ripe for buying, even now. But with other companies, the reverse may be true.
Consider the multinational cannabis business Tilray Brands (NASDAQ: TLRY). It isn't profitable, and this year its quarterly gross margin is contracting under pressure. Its quarterly revenue growth is flat over the past year, and there are problems with oversupply in the cannabis market that are likely to force it to write down its inventory at a loss (again) or lower its selling prices. Therefore, with its performance questionable even before the headwinds of 2022, it probably isn't a good time to buy, unless you can tolerate quite a bit of additional risk beyond what's normally associated with the stock.
Can you invest and still get a good night's sleep?
Per the previous section, investing in the most resilient growth stocks is still a good decision in today's environment, even though investing in the more speculative plays could be more risky than usual. But perhaps the biggest issue is whether you can accept the risks of the growth companies you decide are worth investing in, even when the going gets tough.
If buying shares of a risky business right now is going to have you checking on your portfolio multiple times per day, it probably isn't worthwhile. You only get the benefit of a company's gain in value over time if you are actually able to hold its shares without selling them out of fear or stress about their future worth.
If you can tolerate your positions being underwater for a few months or years, it's a perfectly good time to buy riskier growth stocks like Tilray, assuming you're comfortable with the chance of actually losing your money -- but if that thought terrifies you, it's best to find growth investments like Vertex that are likely to have a bit more staying power regardless of the economy or the market.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
