Choosing the most appropriate stocks for the common stock portion of your retirement portfolio is vitally important.  In part 1 of this series found here I presented the 6 broad categories of stocks (businesses) that renowned mutual fund manager Peter Lynch presented in his best-selling book “One Up On Wall Street.”  I contend that the 6 categories that Peter Lynch wrote about establish a solid foundation of understanding of what’s generally available in the common stock universe. Additionally, I pointed out that these categories were very broad, and suggested that there were significant differences between the individual companies in each broad category.

In this part 2, I will elaborate on a few of the major differences in order to illustrate ways that investors can match the most appropriate stocks to their specific individual investment objectives.  However, what I will be offering is more strategic in nature than specific.  In other words, my objective will be to provide common stock investing strategies that investors can utilize and implement that are consistent with their specific goals, needs, objectives and risk tolerances.  In my personal opinion, the idea that a stock should be chosen in accordance with specific investment objectives is paramount.

Is Your Primary Investment Objective Income or Growth?

In a similar fashion with which Peter Lynch presented his 6 broad categories of businesses, there are 2 primary but broad investment objectives that are generally appropriate for specific portfolios.  These 2 broad investment objective categories are income and/or growth.  However, these investment objective categories are usually not exclusive.  In other words, for most every investor, both investment objective categories are often required. But, they will be appropriate at varying degrees or levels of importance for each individual investor.

For example, an investor already in retirement and thereby living off the income their investments are generating would obviously be more concerned with maximum income.  In the same vein, it would be prudent to the already-retired-investor to also be concerned with having their income grow in order to keep up with inflation.  Consequently, future income growth might take precedence over growth of capital.  Of course, growth of both income and capital would be ideal.

In contrast, an investor planning for retirement, but with several years to go might be more concerned with both growth of capital and growth of income.  The primary objective would be towards having the potential of a greater level of future income when it would be needed.  And of course, there would be many unique investment objectives in between.  Therefore, in my opinion, the key to choosing the most appropriate stocks is to choose those with the characteristics that offer the potential to meet your unique, individual and specific goals. 

Moreover, in order to successfully accomplish your goals, the most critical first step is to clearly define them.  Once your investment objectives and goals are clearly defined, it becomes much easier to focus only on common stocks that possess the appropriate characteristics consistent with those goals.

Help and Perspectives from Readers Comments

Serendipitously, I received a couple of comments on part 1 of this article series that I feel contribute greatly to the content of this part 2.  The first comment I received shared the 8 stock types that MorningStar utilizes.  Although MorningStar provided a couple of additional categories, for the most part, their stock types were consistent with what Peter Lynch wrote about.

Consequently, I offer the following comment, and as I did in part 1 and I present an example of each through the lens of F.A.S.T. Graphs™ that closely reflect the commentary following each MorningStar stock type.  Importantly, these examples are not recommendations.  These examples are only offered to illustrate examples of the various stock types that MorningStar suggests.  Here is the comment with examples:

“For those interested in evaluating the diversification of their portfolios, as Chuck suggests, Morningstar utilizes eight Stock Types: