Did you know that the gap between growth funds and value funds reached a 25-year high in 2020? Growth investing has proven to grant higher returns over the same period of time when compared with value investing.
Yet, under the umbrella of growth investing, there are so many different strategies to explore. While some can be rather conservative, others are more aggressive in accepting higher risk for higher returns.
Overall, growth investing won’t stray from its basic tenant. It’s buying funds and stocks that you expect to appreciate much faster than the market. But, if you’re new to the realm of growth investing, no worries. We’ve got you covered.
Keep on reading for our full breakdown of everything you should know about growth investment. As well as, how to formulate a growth investing strategy, and much more.
Growth Investing 101: The Basics
Growth investing is a popular investment strategy that attempts to increase the value of an investor’s money over time. It focuses on “growth companies,” which can outperform the market in terms of profits growth. And, as a result, are projected to provide better stock price returns.
Smaller firms and/or businesses with a competitive advantage in their sector, such as a revolutionary and distinctive product or service, a patent, or a highly efficient operating structure, may qualify.
Growth businesses often trade at higher multiples than the market and are linked with greater volatility. The “growth investment” strategy is frequently contrasted with the “value investing” approach, which seeks undervalued assets.
At this point, you might be interested in taking a deeper dive into the comparison of growth vs value investing. This is a great guide that will simplify the key differences for your convenience.
Understanding Growth Investing Strategy
There’s a wide gap between understanding the theory of growth investing and actually starting to apply a growth investing strategy.
We urge you to tweak the following blueprint to suit your needs and preferences better. But, if you’re a complete beginner, this is a rather straightforward breakdown of the steps you need to take to invest successfully.
1. Fortify Your Personal Finances
A solid rule of thumb is to avoid buying stocks with money you won’t need for at least the next five years. That’s because, while the stock market typically grows over time, it regularly has sudden losses of 10%, 20%, or more without notice.
Putting yourself in a position to be compelled to sell stocks during one of these downtimes is one of the worst blunders you can make as an investor. Instead, it would help if you were prepared to purchase equities when most others are selling.
2. Get Familiar With Growth Investing Methodologies
You’ve taken the first steps toward a more secure financial future. Now, it’s time to empower yourself with yet another powerful tool: information. After all, there are a variety of growth investment techniques from which to select.
For instance, you may limit your search to large, well-established companies with a track record of profitable operations. Your strategy might be based on quantitative indicators. Like operating margin, return on invested capital, and compound annual growth, which you can find in stock screeners.
On the other hand, many growth investors seek the best-performing firms in the market. As demonstrated by their continuous market share increases, rather than focusing on share prices.
What matters most to your profits, though, is that you stick to the plan you pick. And, avoid the temptation to switch from one method to another just because it appears to be performing better at the time. This strategy is known as “chasing returns,” and it is a surefire way to underperform the market over time.
3. Select the Right Stocks
There are many books available breaking down the science (and art) behind your stock selection, so we’ll cover the foundational ideas you need to know.
The first step in this process is determining how much money you want to put into your growth investing strategy. If you’re new to the strategy, it’s a good idea to start modest, maybe with 10% of your portfolio’s money. This ratio can grow as you become more comfortable with the volatility and gain experience investing in various markets (rallies, slumps, and everything in between).
Growth companies are regarded as more aggressive and hence more volatile than defensive equities. Thus risk plays a significant part in this decision. As a result, a longer time horizon gives you greater leeway to skew your portfolio toward this investment strategy.
If your portfolio makes you nervous, it’s a strong indicator that you have too much growth stock allocation. If you’re concerned about future losses or are concerned about prior market declines, you might wish to diversify your portfolio and decrease your exposure to specific growth stocks.
4. Buy Growth Funds
A fund is the simplest method to acquire exposure to a wide variety of growth stocks. Many retirement plans provide growth-oriented alternatives, which might be the foundation of your investment strategy.
Consider buying a growth-based index fund if you want to take a step farther into self-directed investing. Index funds are an excellent investment vehicle because they provide diversity at a cheaper cost than mutual funds.
Unlike mutual funds, which are managed by investment managers who attempt to outperform the market, index funds merely equal the return of the industry benchmark. Because most investment managers fall short of that standard, an index fund will generally put you ahead of the game.
5. Properly Screen for Growth Funds
You can purchase individual growth stocks if you want to take another step into the do-it-yourself sector. This strategy offers the best chance of outperforming the market, but it also entails a lot more risk than investing in a diversified fund.
You’ll want to screen for the following variables while looking for growth stocks. Pick stocks from companies with higher-than-average profitability, as well as a stable (and consistent) historic growth in their sales or revenue.
Breaking the Walls of Investment Growth Formula
When you start investing your own money, the process can be rather stressful and time-consuming. However, it doesn’t have to remain that way.
We hope that our explainer on the nuances of growth investing has shed some light on how it all works. And, if you enjoyed our article, know that there is so much more where that came from. You can check out additional tips and strategies, all available to you in our finance section.