As a general rule, I believe investors should consider tilting their portfolios toward value stocks as they approach retirement. And this is true regardless of whether your ambition is to build wealth or earn passive income.

A person aged 40 will not be entitled to a UK State Pension for another 28 years. And that means there’s plenty of time, which opens up more opportunities for growth stocks.

Development and value

Investing in the stock market involves buying shares of a company in the hope that one day it will earn enough to provide a decent return. There are two huge differences between growth and value stocks.

The main difference is when the company will provide this return. Generally speaking, value stocks that trade at lower sales and earnings multiples offer much greater returns in the near future.

The second difference is how much the company will provide in the long run. In exchange for lower short-term profits, they usually have better prospects of generating huge profits in the long run.

An investor who wants to retire in five years probably doesn’t have time to wait 20 or 30 years for the company to grow. But for someone with a longer time horizon, the situation may be different.

UK Growth Stocks

Halma (LSE:HLMA) is a good illustration of this. The FTSE100 the company has a market value of £10.5 billion and earned £333.5 million of free cash flow last year, a return of just over 3%.

For an investor with a shorter time horizon, this may not be as attractive. The UK five-year government bond currently has a yield of 4.2%.

To be able to offer investors a higher return, Halma will need to raise its free cash flow by 10% annually. And this is by no means guaranteed.

Halma generates much of its growth by acquiring other businesses, which means it depends on emerging opportunities. There is a risk that they will not succeed within five years.

Long-term investing

However, after 30 years, the equation becomes much better. The corresponding bond has a 5% yield, but just 3% annual business growth would result in Halma generating more cash.

This reduces the risk for investors. And while the company may see a five-year cyclical low in terms of acquisitions, I wouldn’t expect this to continue through 2054.

Over the last decade, Halma’s free cash flow per share has grown at an average of 11.5% annually. Even if it manages to cover half of that amount in the future, it should generate enough cash to provide an annual return of 8.4%.

This does not eliminate the risk of growth through acquisitions – it is still possible to overpay due to misjudgment. However, the investing equation makes much more sense in the long run and is worth considering.

No savings? No problem…

Even without savings, using some of your monthly income to invest in stocks can yield great returns. In turn, growth stocks can be an excellent choice for investors who think about investments over the decades, not years.

Investors must be prepared to wait for economic growth to emerge. While I believe that people who are close to retirement should consider focusing on value stocks, 28 years is long enough to look for growth.