The difference between growth and income

An important step in your meeting your financial goals is deciding whether your portfolio should focus on generating income, long-term growth, or a combination of the two. Very often this is done by investing different amounts in stocks, which can grow in value over time, and in bonds, which generate income by paying interest.

It’s also important to note that some stocks have an income component, and there’s also the potential for bonds to deliver some growth (increase in value).

Is a growth or income portfolio better?

This chart shows the performance of various portfolios since 2007, each of which has different income and growth characteristics. For instance, the portfolio with 100% bonds generated the most portfolio income. In contrast, the portfolio with 100% stocks generated the most long-term growth. This is evident from how the portfolios have performed over the past several years.

Source: Clearnomics

Balancing growth and income to reach your goals

It's easy to see that there’s a trade-off between short-term income and long-term portfolio growth. There is no right answer when it comes to which is the best portfolio, and you don’t have to pick one or the other. Certain fixed-income and dividend equities that provide sources of income can add safety to your portfolio and help balance more growth-focused investments. Deciding between income and growth or striking a balance between the two depends on your personal financial objectives.