You can reduce much of the risk of a growth investing strategy if you use the advice we share in this article
Among the considerations that go into a successful growth investing strategy, many investors overlook a number of important factors that can considerably lower their risk.
For example, online trading has unique risks. It may look like a fairly quick and convenient way to build wealth, but there are hidden dangers that may not be evident at first. The main risk comes from the fact that it all may seem deceptively easy. The lower costs and higher speeds of online trading can lead otherwise conservative investors to trade too frequently. That can lead, among other things, to selling your best picks when they are just getting started.
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The apparent ease of online trading may even prompt conservative investors to take up short-term trading or day trading. That’s just another danger of trading stocks online: there’s a large random element in short-term stock-price fluctuations that you just can’t get away from—no matter how sure-fire your strategy appears.
In the end, there’s no such thing as risk-free investing. The tips below for lowering your growth investing strategy risk have long been part of the advice we give you in our investment services and newsletters, including our flagship publication, The Successful Investor.
Be skeptical of companies that mainly grow through acquisitions. Making acquisitions can speed up a company’s growth, but it also adds risk that can undermine a conservative, safe investing approach. Great acquisitions are rare finds. Many acquisitions come with hidden problems or risks, or they turn out to have been over-priced.
Despite the risks, some acquisitions turn out hugely profitable. So, your growth investing strategy shouldn’t automatically discount companies that have grown through acquisitions. Just keep the risks in mind, and avoid companies that seem unaware of them.
Don’t overindulge in aggressive investments. Aggressive stocks can give you bigger gains than more conservative stocks. But they also expose you to a greater risk of loss. That’s why we recommend limiting your aggressive holdings to no more than, say, 30% of your overall portfolio.
Ultimately, the percentage of your portfolio that should be held in either conservative or aggressive investments depends on your personal circumstances and risk tolerance—and your own growth investing strategy. An investor with a longer time horizon or without the need for current income from a portfolio can invest more money in aggressive stocks.
Keep stock market trends in perspective. It pays to keep in mind that the stock market often anticipates trends—but no trend lasts forever. As well, stocks sometimes put on lengthy downturns due to business and economic problems—but the downturns typically go into reverse long before the problems get resolved.
Keep an eye out on a growth stock’s debt. It should be manageable. When bad times hit, debt-heavy companies go broke first. This is one of the best ways you can mitigate risk in your own growth investing strategy.
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.
Look for 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.
Balance your cyclical risk. If you can find a growth stock that has freedom from business cycles, you’re in good shape. Demand periodically dries up in “cyclical” businesses, such as resources and manufacturing. That’s why you need to diversify. Invest in utility, finance and consumer stocks, along with resources and manufacturers.
If you want your growth investing strategy to be profitable for decades, you should follow our tips above. But you can also use a technique called dollar cost averaging. That’s when you buy stocks gradually during the course of your working years. By using this strategy, market declines will have little effect on your long-term profits.
For instance, a dollar-cost averaging strategy involves investing equal amounts of money over a specific period ($200 a month, say).
It’s a little like systematic saving, except that you put your money into stocks (or ETFs) instead of a bank account.
If you invest a fixed sum at regular intervals throughout your working years, perhaps increasing that sum from time to time as your income rises, you can largely forget about market trends. That’s because you’ll automatically buy more shares when prices are low and fewer when they are high, and you will benefit from the long-term rising trend in the market.
All in all, if you implement dollar cost averaging and a solid growth investing strategy you’ll lower your risk considerably.
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.
Do you have a process when you’re investing in growth stocks that you’d like to share? What do you look for? Share your experience with us in the comments.
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