Topic: Growth Stocks

Follow these tips if you want to successfully invest for long-term growth

Investors interested in investing for long-term growth for maximum portfolio returns should consider mixing value, dividend and growth strategies together. Here’s how:

Investors who succeed over decades by investing for long-term growth—the Warren Buffett’s of the investment world—rarely, if ever, talk about spotting market tops and bottoms. They are far more likely to talk about successful investments than wondering when they should sell their blue chip shares. Most have come to see, often after a period of costly stock-trading errors, that you make most of your stock-market profits through stock selection rather than stock market predictions.

So, we continue to think investors, instead of moving between extremes of risk, will profit most—and with the least risk—by buying shares of well-established companies with strong business prospects and strong positions in healthy industries.


Above average for years or decades

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Take advantage of compounding to get the best results when you’re investing for long-term growth

Compound interest can be considered the mother of all long-term investment strategies. This tip is especially important for young investors to learn. And the benefits of this stock trading tip apply not only to fixed-return, interest-paying investments, like bonds—but also to stocks. When you earn a return on past returns, including reinvesting dividends, the value of your investment can multiply. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate.

To profit the most from this tip, you also need to pay attention to steady drains on your capital, even seemingly small ones—like high brokerage commissions. If you’re losing (or missing out on a profit of) even 1% a year, it can have an enormous draining effect on your investments over a decade or two.

Use dividend growth stocks as part of your strategy for investing for long-term growth and you should experience higher portfolio returns

Growth stocks, by their very definition, should be a part of any Successful Investor stock portfolio focused on steady gains over time. The key is to discover the stocks that will grow at higher-than-average rates within their industries, or within the market as a whole, for years or even decades.

A dividend growth investing strategy looks for growth stocks that also pay a dividend, which is less common than with, say, value stocks. The best growth stocks can offer above-average gains, and the dividend just adds to their appeal.

As with conservative dividend-paying stocks, dividend growth stocks offer investors an added measure of security. Dividends, after all, are much more stable than earnings projections. More important, dividends are impossible to fake—either the company has the cash to pay them or it doesn’t.

However, at the same time, it’s important to avoid judging a company based on the fact that it pays a dividend. Nor should you be tempted solely by a high dividend yield (the percentage you get when you divide a company’s current yearly payment by its share price). We say more on that below.

As well, you should always remember that while growth stocks can hold the potential for greater gains than conservative selections, they typically expose you to a higher level of risk—even if they are dividend-paying stocks.

That’s why we look beyond dividend yield when making investment recommendations, and look for dividend stocks that have an established business and at least some history of building revenue and cash flow.

When you are investing for long-term growth, include both growth and value investing strategies

Academic studies suggest over certain time periods, value investing produces better results than growth investing. But these studies mostly look back on what would have happened in a particular historical period, if you followed a particular set of rules. Most distinguish between growth and income investing by looking at average p/e’s (price-to-per-share earnings ratios). They assume high p/e’s are a marker for growth stocks and low p/e’s for value stocks. As any serious value or growth investor can tell you, it’s more complicated than that.

If you balance and diversify your portfolio following our Successful Investor approach, it should include both growth and value selections. In both areas, however, you should avoid extremes.

If a stock seems like an exceptional bargain in relation to earnings or asset values, it may suffer from hidden risks. The stock can plunge when those problems begin to take their toll.

On the other hand, if a growth stock trades at such a high price that it needs exceptional results to move ahead, then it suffers from obvious rather than hidden risk: a single quarter of bad earnings can spark a collapse in its value.

Use our three-part Successful Investor approach for successfully investing for long-term growth

  1. Hold mostly high-quality, dividend-paying stocks.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
  3. Downplay or stay out of stocks in the broker/media limelight.

It can be difficult for some investors to practice long-term investing strategies because they lose patience. How do you safeguard your portfolio against erratic decisions?

What is the best advice you would give someone for creating a long-term growth strategy for their portfolio?

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