Growth investing can be beneficial to your portfolio returns—but not every strategy is money in the bank.
To profit from growth stocks, you need to pick stocks with clear growth prospects and not simply momentum stocks with uncertain futures. Chosen wisely, high-quality, growth-oriented stocks can be worthwhile additions to most well-diversified portfolios.
Here are three growth investing strategies: one we don’t like, and two we do.
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.
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.
Growth investing strategy: Stay away from day trading
Day trading is the short-term buying and selling of securities. Some brokerage firms that practice day trading complete thousands of trades in a day. New and inexperienced investors often have aspirations of becoming day traders.
Most non-professionals who get involved with day trading or options trading wind up losing money if they stick with it long enough. In that respect, it’s a lot like playing casino games.
The big risk with day trading is that you’ll try out a risky and ultimately unwinnable investment approach, and hit a lucky streak. This could embolden you to put serious money at risk just when your results are about to regress to the mean and deliver losses instead of profits.
All in all, it’s far more important to focus on high-quality, well-established growth companies and how they fit in your portfolio. The longer you hold these stocks, the greater the chance that your profits will improve.
Growth investing strategy: Aggressive stocks can boost your gains
An aggressive stock is a higher-risk investment that can potentially produce higher returns than more conservative stocks, but also has equal potential for bigger losses.
An aggressive stock is often more highly leveraged (with more debt) and volatile than value or conservative stocks. That doesn’t mean you should avoid aggressive stock investing altogether. Even for conservative investors, there are very good reasons to add some aggressive stocks—in limited quantities—to their portfolios. In fact, if you choose the right aggressive stocks, they can offer the opportunity to earn bigger returns without exposing you to excessive risk.
As a general rule we recommend that you limit aggressive stocks to a smaller part of your overall portfolio. That’s especially so for conservative investors. Examples of aggressive stocks would include junior mining stocks, smaller technology stocks, and penny stocks.
Growth investing with aggressive stocks: Four key ways to cut risk
- Limit aggressive investments to a smaller component of your overall stock portfolio.
- Cut your risk all the more by taking a conservative approach to your aggressive investing.
- Downplay stocks in the broker/media limelight.
- Look for aggressive investing stocks with hidden value.
Growth investing strategy: The top technology stocks offer strong growth prospects
Tech stocks are companies that are involved in the research, development and production of technology such as electronics or software. With high research and development budgets, tech stocks rarely pay dividends and are often classified as growth stocks.
The best tech stocks have strong growth prospects. The best technology companies can also become so successful that they start paying dividends. Investors should scour a technology stock’s balance sheet for any indication of hidden value like research and development that will pay off in the future.
The success or failure of any tech stock depends on a variety of factors. The company may start out with a promising business plan. But it needs all sorts of things to prosper in the long run: the right employees, a favourable economic and regulatory climate, a favourable competitive environment, favourable research outcomes, adequate financing, perhaps the right merger partner or acquisition—the list is long.
Four ways to increase your growth investing rewards with tech stocks
- Buy multi-product companies: Focus on tech stocks that have some existing or soon-to-be-released products, and avoid one-hit wonders.
- Diversify: invest carefully and buy 5 to 10 tech stocks instead of just one. Gains on your winners can help offset any losses you may have.
- Focus on up-and-coming technologies: You need to know how technology is changing to do this.
- Look for earnings: A perpetual money loser will eventually go broke, but if it makes even a little money, it can stay in business and perhaps reap the outsized benefits of a new product.
Have you had luck with growth investing? What do you look for in a company before you commit a portion of your portfolio to it?