As an investor, I always try to strike the right balance of risk and reward. No matter how rewarding an investment might be, I will avoid one if it does not match my risk appetite. Lately I have been considering investing in Scottish Mortgage Investment Trust (LSE: SMT) after its share price halved in the past year. Does the falling price of Scottish Mortgage shares signal growing risks? Or is the stock a bargain for the potential rewards on offer?
Risk and reward
I think the answer is a bit of both.
Scottish Mortgage invests in dozens of companies, with a focus on areas of high potential customer demand. But some of its holdings, such as Amazon and MercadoLibre, have seen their shares plummet in the past year. Amazon has halved during that time.
Such a sharp fall highlights a risk of investing in growth stocks, which is that Scottish Mortgage could lose money if it buys high and ends up selling low. Even if it holds on to the shares, most investment trusts trade close to the net asset value of their portfolio. So when the share price of a major holding crashes, it is likely to affect the Scottish Mortgage share price negatively.
But I also see possible rewards from investing in promising growth stories. As a believer in long-term investing, I do not worry about short-term movements in the price of shares owned by Scottish Mortgage. I continue to see future potential for many of the companies in which it has invested. Its long-term investing strategy mirrors my own and allows it to benefit as promising companies bloom into sizeable businesses.
Impressive track record
I see Scottish Mortgage as a class act.
Past performance is not a guide to what will happen in future. But I think it is worth bearing in mind that Scottish Mortgage has proven its ability to find compelling growth shares time and again. Even after halving in the past 12 months, the shares are 65% more valuable today than they were five years ago.
It has paid a dividend every year for many decades and the last time it cut the payout was before the Second World War. While the current dividend yield of 0.5% is not particularly attractive to me, I do like the trust’s long-term approach to rewarding shareholders.
I’d buy some shares
In fact, if I had spare cash to invest today, I would take advantage of the price fall in the shares to buy some for my portfolio.
Owning shares in this investment trust would offer me exposure to a diversified range of growth shares from global markets. Some may not perform well but hopefully others will do excellently. That could help push up the price of Scottish Mortgage shares in years to come.
This post was originally published on Motley Fool
