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Growth or income shares: Which is better for 2020?

While we Fools are all looking to invest in the next top stock, there are generally two groups of ASX investors – those who are looking for growth and the others wanting high-income shares.

So, should you be investing in the next Afterpay Touch Group Ltd (ASX: APT) or is a stock like Alumina Ltd (ASX: AWC) a better buy for long-term portfolio growth?

Why growth stocks are a double-edged sword

Some of the top performers within the S&P/ASX200 Index (INDEXASX: XJO) have been the hottest growth stocks on the ASX including the ‘WAAAX’ group of WiseTech Global Ltd (ASX: WTC), Afterpay, Appen Ltd (ASX: APX), Altium Ltd (ASX: ALU) and Xero Ltd (ASX: XRO).

However, while many of these companies’ share prices have doubled since the start of 2019, we saw in early August the double-edged sword of the Aussie growth stocks: high volatility.

The WAAAX share prices all plummeted 15% lower in just a matter of days as the US-China trade war tensions ramped up again with more tit-for-tat tariffs.

Growth stocks are usually the hardest hit segment on the market in a downturn given a large percentage of their share prices are based on future growth expectations rather than actual cash flow.

Despite a cooling off in the ASX200 performance since June, valuations remain very high which makes growth stocks vulnerable in the event of a market correction or recession in the coming 12-18 months.

Are income shares the answer?

The alternative would be to invest in some of the high-income shares on the ASX such as Alumina Ltd (ASX: AWC) or Bank of Queensland Ltd (ASX: BOQ).

Alumina and BOQ are currently yielding 11.8% and 8.3% per annum, respectively, which when reinvested can represent a viable strategy to rival that of ASX growth shares.

While capital growth hasn’t been great for either the Alumina or BOQ share prices so far this year, a consistent dividend stream reinvested in an ASX company with a strong balance sheet and earnings profile can work wonders for your net worth.

Foolish takeaway

In the end, either strategy is able to deliver strong returns in the long run and Fools’ main focus should be on picking the winners and ditching the losers in their ASX portfolio.

It’s not very often that a top growth stock like Afterpay comes along, which is why a diversified ASX200 portfolio is a good long-term option as part of a “buy and hold” strategy.

Whether you jump on board the growth stocks or reinvest the dividends from those high-yield ASX stocks, discipline and consistent investing should boost your wealth and put you firmly on the retirement track.

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Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO, Altium, WiseTech Global, and Xero. The Motley Fool Australia owns shares of Appen Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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