The most successful investors follow a sound growth investment strategy. Here are some top tips.
Although growth stock picks can be highly volatile, they can make good long-term investments. They may be well-known stars or quiet gems, but they do share one common attribute—they are growing at a higher-than-average rate within their industry, or within the market as a whole, and could keep growing for years or decades.
Do you want to adopt a growth investment strategy of your own? Take a look at these recommendations.
For a rising portfolio
Learn everything you need to know in 'How to Find the Best Growth Stocks' for FREE from The Successful Investor.
Canadian Growth Stocks: CGI Group, CAE Inc., Fortis Inc. Stock and more.
A growth investment strategy for long-term investing
For most investors in growth stocks, you should limit your growth investment holdings to a reasonable part of your overall portfolio. But above all, when looking for growth stocks that have the potential for higher returns, always focus on investment quality first.
Here are some tips for selecting growth stocks as long-term investment stocks:
Always review the balance sheets of the growth stocks you want to invest in.
While you are looking at balance sheets, look for hidden assets like real estate. At times, the hidden assets in a company’s real estate can even come to exceed the market value of its stock.
When investing in more speculative growth stocks, use our “sell-half” rule. This says that if a speculative stock you own has doubled, you should sell half so you get back your initial stake.
If you are too slow to sell speculative stocks in your growth portfolio, your profits, and even your principal, can evaporate all too quickly.
Try to find growth stocks that have ownership of strong brand names and an impeccable reputation. Customers keep coming back to these businesses, and will try their new products.
Hidden assets are favourable elements to a growth investment strategy
Hidden assets can make a huge difference in growth stocks in the long term. The best time to find hidden assets is when they’re still hidden, long before the company begins taking steps to profit from them. Understanding and seeking out hidden assets while you’re evaluating a stock can add enormously to your profits in the course of an investing career. But you need the patience to profit from them because they can stay hidden for a long time after you buy.
Hidden assets can also cut your risk. Stocks with hidden assets are likely to hold up better than those whose assets are easier to spot since they are the last stocks that experienced, successful investors sell. When times are good, on the other hand, stocks with hidden assets tend to do better than average. Good times give them opportunities to put their hidden assets to work.
The best growth stocks should have the ability to profit from secular trends.
These trends outlast ordinary business booms and busts, because they reflect ongoing social change. Free trade and rising environmentalism are just two examples of secular trends.
Bonus: Balance your growth investment strategy with value stocks
Most successful investors hold some growth stock picks and some value stocks at any given time, depending on where they discover the best opportunities. Adding value stocks to your growth stock holdings can lower your portfolio’s volatility.
Value stocks are stocks trading lower than their fundamentals suggest. They are perceived by investors as undervalued, and have the potential to realize their full value. Many technology stocks, for instance, start out as growth stocks and transition into value stocks.
Together, growth stocks and value stocks can form a winning combination. A growth stock can be a top performer while the company is growing. However, a single quarter of bad earnings can send it into a deep, though often temporary, slide. Value stocks can test your patience by moving sluggishly for months, if not years. But they can make up for it by rising sharply when investors discover their true value.
When it comes to building a growth investment strategy, don’t let sound bites and nebulous predictions warp your stock trading decisions. Instead, minimize your portfolio risk by following our three-part strategy: Invest mainly in well-established, dividend-paying companies; spread your money across most, if not all, of the five main economic sectors (Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities); and avoid stocks in the broker/media limelight.
Have you lost money investing in growth stocks? What do you think your mistake was?
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